Since we are on the topic of the EU’s CSRD – its extra-jurisdictional scoping requirements require non-EU companies with a large enough presence in the EU to disclose under the framework. Materiality assessments must be conducted on a variety of ESG topics. The results of those assessments, along with detailed information on material issues, must be disclosed in the company’s report. As with just about any law, it brings a high litigation risk.
The obvious litigation risk stems from ensuring compliance with the law, but there is another less obvious risk. While disclosures will be made in line with EU law, the disclosures will be public, which means that they may create actionable litigation issues for investors and other jurisdictions’ regulatory bodies. For example, the SEC already scrutinizes voluntary ESG reports and can bring enforcement actions based on the statements therein. This means that the expansive disclosures under the CSRD can be subjected to the same scrutiny fro the SEC and potential enforcement actions may arise from improperly disclosed issues. A recent Skadden memo analyzes this risk stating:
“Any public disclosures required under the CSRD would be subject to the anti-fraud provisions of U.S. securities laws and potential scrutiny by U.S. investors looking for statements that could be the basis for a lawsuit. For example, a U.S.-listed company that publishes global, group-wide ESG information only on its website or in an ESG report — primarily to comply with the CSRD and without including the same information in the company’s SEC filings — may nevertheless face a U.S. investor lawsuit or SEC enforcement action based on that information. The risk could be heightened given the CSRD’s requirements for granular disclosures that go beyond current SEC requirements.”
The CSRD also uses a double materiality approach, while the US uses a financial materiality standard. This means that companies may find themselves having to explain to the SEC why an issue meets the double materiality threshold but not the financial materiality threshold. The CSRD is going to have major global impacts for ESG disclosure – companies should ensure that they’re considering the full implications of compliance. Our guidebook “How to Conduct an ESG Materiality Assessment” is available to PracticalESG.com members to help them with this.
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