Regulations Shaping Corporate Sustainability | ESG Decoded Podcast #179

Welcome to ESG Decoded, where we unravel the business complexities at the intersection of environmental, social, and governance issues. I'm Erica Schiller, and I'm joined by my Climb Co colleagues, Emma Cox, and Anna Stable. Get ready to explore the intersection of sustainability, innovation, and ethical leadership. The dynamic forces shaping our global economy. From climate action to social responsibility, we're here to decode the ESG landscape by interviewing interesting leading figures across the globe that will empower you with actionable insights. Whether you're a seasoned practitioner or just embarking on your sustainability journey, this podcast is your compass for navigating the future of responsible business practices. Let's decode ESG together. Welcome to ESG Decoded. I'm your host, Erica Schiller. Today, I'm being joined by Stavros Cadini. Stavros is a professor at Cal Berkeley, and he is the director for the Berkeley Center of Law and Business. Stavros focuses on corporate law and securities regulations, but sustainability has become more important across the corporate space and has become a legal issue that he's been watching for the last several years, and he has had a focus on sustainability since 2020. Stavros also helped pioneer the Berkeley Corporate and Climate Summit that started in 2024, and we're excited to talk to Stavros today about how the law and corporate lawyers are thinking about climate and what risk they're seeing, what opportunities, and how they think about compliance. So Stavros, thank you so much for joining us. Thank you very much for having me, Erica. I'm very excited to be here. And today, we're going to talk about corporate sustainability and the reporting aspects because a lot of those are what's kind of driving the legal framework of voluntary reporting, but also government mandated reporting. So why is sustainability reporting important and what impact does it have on businesses and consumers? The sustainability reporting is hugely important for businesses. I think we all remember a few years ago, every corporation would issue some reports that had green pastures and trees and say, "We're very sustainable and we're doing the best for the environment," but it was very difficult to figure out who is right and who is wrong, who is honest and who is working hard towards that goal because they were all claiming the mantle of sustainability. What sustainability reporting does is that it actually helps us ensure that corporations carry out the promises that they make to their consumers and to their shareholders. It helps us understand what steps are taking, what kinds of efforts they're putting, what kinds of resources they're committing, what progress they're making, what hurdles they're facing. And that allows us, essentially, to understand the level at which we're getting then the effort that we need to continue. So that means that consumers can better trust them, investors can trust them, regulators can trust them. And it also helps companies themselves because through this process, they put themselves under scrutiny, and that means they can be more effective at what they're doing, especially as the sustainability has become an increasingly important issue for consumers. It also helps consumers choose more effectively what products to buy and for what reason. And this, it also helps consumers reward firms that are serious about it. So companies that are performing better in honest and ability that are committing more resources that are making and overdue changes can benefit from support, from investors and consumers. So I'm hearing transparency, right? It's providing transparency for businesses to be more clear about how they measure their sustainability targets and goals and also help consumers really understand what do they mean by these green pasture statements? Are they really doing what they say they're trying to portray? Yes. And transparency is very important. So when we talk about regulations, in the US, we're seeing a lot of federal talk about rolling back requirements. Can you share a bit about some recent changes in US requirements around sustainability reporting and who might these impact? So sustainability reporting became almost ubiquitous. A lot of companies were doing it over 90% of US companies were issuing some sort of sustainability report before it became mandatory. So they were doing it mostly voluntarily. At that point, because of the lack of any overarching regime, the Securities and Exchange Commission under the Biden administration seriously considered issuing a mandatory climate disclosure rule. It was a proposal that became the most controversial proposal the SEC has ever issued. It got a record number of common letters with a lot of investors supporting it, but also a lot of investors opposing it because people were concerned that it's going to increase the cost of disclosure for many. Now as a result, the SEC initially scaled back the most demanding aspect of its proposals, which was the requirement to report what is known as scope three emissions, indirect emissions caused by products outside the company. And ultimately, even this kind of diminished version of the SEC's mandatory climate disclosure rule was challenged in court. Now after the election, the Trump administration decided that it will not defend the rule in court anymore, which effectively means that the rule will not go into effect. Now if it had gone into effect, it would have required all publicly traded companies to report on greenhouse gas emissions, scope one and scope two, which essentially means emissions that the company is directly making and emissions that are caused by its use of transportation. For some companies, these are 60 to 70 percent of their total emissions. But for other companies, like Apple, for example, is only only about 5 percent of its total emissions. Right. So now there are no SEC requirements, all of those have been rolled back. And we've also seen some changes in reporting requirements in the European Union. Can you share a little bit about how that might be similar or different from what's happening at the US at the federal level? Yes. So the EU is following a very different path than the US. For the EU, the assembly has been a core strategy through its green deal package. So on the corporate reporting stage, the EU has passed a corporate sustainability reporting directive or a CSRD that it was adopted in January 2023 and applies progressively over 2024 and 2025. And it requires companies to provide disclosure about emissions, but not only that, it requires companies to provide disclosure about climate events on the basis of a standard known as double materiality. So that means that they have to disclose first ways in which climate events might be material to the company, for example, emissions are material to the company itself because it suggests a thousand, a thousand investors care about it. And that might have an effect on the company's own price. But they also have to report ways in which the company impacts climate, even if it's not material to the company itself. For example, it could be that a company creates a lot of pollution at a local level and the fines that they will have to pay are not very important for a very big multinational company. But they're very important for the environmental, local environment in which it operates. So you need to make this report too. So the EU has put in place a much more demanding standard for corporate sustainability reporting and regulatory arrests. However, there has been a recent wallback in the EU as well. So initially, those reporting requirements would extend over very big number of companies. But now, in the recent omnipotent package, they've limited it mostly to publicly traded companies. And some of the strict requirements, such as the requirement to report the indirect emissions on scope three, are not going to come in the force until a few years later in 2027, 2028, depending on certain circumstances. OK. So we're not seeing a full rollback, but we're seeing some delays in some of the reporting requirements in the European Union. And we touched on US at the federal level, but not all regulations in the US are being removed or reduced. Let's talk a little bit about what's happening in California, the regulations that are requiring sustainability reporting, where you and I are both located. Yes. So California decided to kind of jump the gun. And while the SEC was mulling over its mandatory disclosure rules, California decided to come up with its own version. And they've passed two main initiatives, the Climate Corporate Data Accountability Act, or SB253, which is about emissions reporting, and it requires all public and private companies doing business in California with over 1 billion in revenue to report scope one and two emissions starting in 2026, and scope three emissions starting in 2027. This is a very important initiative because it's based on revenues rather than status as publicly traded or private, so it applies to big private companies as well. And according to some estimates, it's going to apply to over 4,000 or 5,000 companies. So there are a lot of corporations that are subject to this reporting. Now, in addition to that, there's a second act on the Climate Related Financial Risk Act SB261, which requires companies over 500 million in revenue to disclose climate-related financial risks and mitigation plans. So if they're going to suffer from climate change in certain ways, they have to disclose what they're doing to T.O. with implications of climate change or other climate-related risks for their business, and they have to update us every two years. Now, all this would be smooth sailing if the SEC had gone ahead with its own mandatory disclosure regime because they would have that the federal authorities would carry most of the weight. But now that the SEC rolled back its regime, California authorities have a much more important, much more central role to play. So CARB, the local regulator, is charged with producing the regulations that are important for implementing these broad mandates, and they're now at the stage of collecting feedback from local stakeholders coming up with proposals, and kind of drafting the details of implementation. They're not formally delaying the application of this regime. They both regimes come into place in January 2020, so a few months from today. And they have said that for the reporting aspect of it, they're going to be lenient in the first year, and they're not going to start enforcement if they believe that the company has made a good faith effort to comply. So we're going to have some adjustment. And so, you know, there are companies that will fall into the European Union reporting requirements, there are many that will fall into doing business in California requirements. But for everybody else, how are the voluntary reporting standards, you know, the requirements around the voluntary reporting kind of stepping in, and how are they responding to kind of this void of regulatory requirements? So something that was fascinating to watch for a lawyer was this development of voluntary standards, and at first use mandatory standards. So sustainability started mostly on a voluntary basis, a lot of companies had started reporting on a voluntary basis, and there were a lot of organizations, mostly nonprofits, that were producing standards early on. Some of the most important ones are the GRI or the TCFD, you might not have heard of this. But there was a big initiative a few years ago to consolidate one of the most important initiatives the Sustainability Accounting Standards Board, which was based, where we live in San Francisco, with the International Financial Reporting Standards, a global standard, et cetera, that has been setting accounting standards for most countries in the world apart from the U.S. for the last 20 years or so. So when IFRS launched its own sustainability initiative, it merged with SASB and created this voluntary institution called ISS International Sustainability Standards Board. There are a lot of companies that draft sustainability reports and follow guidance provided by the ISSB. So this was a private initiative, right? And the ISSB is not a government organization, but it gained acceptance first in the market, and then gradually many countries have started adopting these standards as domestic law. So Brazil was the first one to do it, and now there are over 30 jurisdictions that are considering it, including some very big players like China, Australia, Canada. So these are gaining steam. And that's kind of a great testament to the effort of developing standards through private initiative, through stakeholder engagement, and with a view to what companies can really do and can really offer on the ground. How does that relate to the greenhouse gas protocol? Because doesn't the California regulations talk about the greenhouse gas protocol? So the greenhouse gas protocol itself was something that came out of such a private initiative. And that's something that not many people know. And I don't know, some people might feel queasy about it when they hear that the company that supported the emergence of the greenhouse gas protocol in its early steps was actually BP, the oil company. And that was because BP had realized that he needed a sustainable strategy in order to kind of guide its business decisions for years to come. But you couldn't have a sustainable strategy if you couldn't measure it. And that's why they realized the need for measurement. And that's why they supported the nonprofits that were working in this area. And they initially came up with a measurement system. And then they also provided a first set of about 30 other big corporations, including technology companies like Microsoft and Apple, banks like JP Morgan, and other manufacturers to test the GHG protocol. And only after this rigorous testing process was the GHG protocol broadly accepted as a standard for measuring emissions. So it's interesting, and for me, comforting to hear that it was corporations that really supported this idea from the very beginning. Yeah, very interesting to see how these climate policies and ways of measuring have evolved and really started in the private space and have kind of adopted more broad applications. And you know, with these changes in disclosure requirements, how might they impact clean energy's growth in the US and in Europe? So you know, this is a topic that the business price is all about every day. There is an article on the worst of general about being back on clean energy is the Senate going to kill California's initiative for fuel efficient EVs. So reporting requirements where one of the key drivers are one of the key drivers behind clean energy because they impose discipline on companies to show improvement year after year after year. That's the point of disclosure. So as a result, the fact that there's now this retreat from mandatory reporting might actually slow down investments in clean energy, especially in the US. In Europe, the reporting requirements will kick in a little later. So there might be consistent pressure still. Now on the other hand, the fact that states like California are pushing for this initiative means that investments will continue in this respect, especially in California, clean energy has made huge strides and recent years. So this low-cost pressure will continue to build up by both each. Yeah, it'll be interesting to see with energy demands growing, with electrification and artificial intelligence and data centers, how that will impact the demand for clean energy, especially with the changes in the one big beautiful bill impacts to the tax credits, right? So that's something I think we're all going to be watching for. And you know, Stavros, you have a unique perspective being both an expert in your field but also talking in the classroom with young minds. So you know, I'm interested to hear, do you have any closing thoughts or things we should be watching for as the space continues to evolve? So I can definitely say that the young people are in favor of sustainability. It makes sense. One of the key kind of elements of sustainability is it's concerned about the future. And the young people are looking 20, 30, 50 years in, and they're really concerned about what's going to happen. But what I tell them is that I don't think this is an area where we can simply rely on governments to innovate. It is an area where there is a lot of space for private initiatives. Governments don't really know exactly what to do and how to move forward. And it's important for the private sector to continue holding the initiative and choosing paths that are going to be sustainable because this is the best way for innovation and the best way to get us ultimately to a future that we all are going to love living in ultimately. That's great. Thank you so much for joining us and thanks for sharing your experience and your thoughts. Hopefully, we can connect again soon. It was a pleasure to be here and I hope we can continue this conversation right in time. Thanks for tuning in to ESG decoded. We hope this episode has inspired you to take action in your own ESG journey, stimulating ideas for partnership and innovation. Two episodes dropped by weekly on Tuesday morning. Subscribe now on your favourite streaming platform to stay in the loop. Join the conversation on social media using @esgdcoded or visit climbco.com for more resources. Until next time, keep decoding, keep innovating and keep making a positive impact. (bright music)