Governments Inch Forward With Climate-Related Risk Disclosure & Supply Chain Due Diligence
Climate-Related Risk Disclosures and Supply Chain Due Diligence Updates from Around the World
Governments are continuing to take incremental steps to foster greater transparency to better understand climate-related risks to companies and the financial sector. To do this, they are adopting mandatory risk disclosure and supply chain due diligence rules that bolster transparency around the risks and opportunities related to climate change for companies. At this time, countries are at different stages in developing their policies and regulations. With climate-related risks expected to grow in the coming years, countries are likely to either adopt new disclosure and due diligence regulations or tighten the ones they already have in place.
In this ever-evolving landscape, Orbitas – a Climate Advisers initiative – continues to keep the financial sector up to date on existing and emerging regulatory regimes and due diligence laws around the world. Our recently updated Climate-Related Financial Regulation Explorer provides a comprehensive overview.
Climate-Related Risk Disclosure: Country Highlights
Climate risk disclosure regulations have the potential to significantly alter how public companies measure, report, and address risks from climate change. Governments are putting these new regulatory regimes in place to help companies mitigate financial and physical risks from climate change, while also creating frameworks for clear, consistent, and comprehensive climate-related information that are useful to investors. As governments move forward with new regulations, they are focusing on mandatory reporting, aligning rules and regulations with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), considering investor requests, and making indirect emissions, or Scope 3, a key focal point.
In the United States, the Securities and Exchange Commission (SEC) stayed the implementation of its Climate Risk Disclosure Rule pending appeal in federal court. The rule, finalized in March of 2024, came under immediate criticism and saw legal challenges. Under the rule, the SEC requires companies to report climate-related risks that are “reasonably” likely to affect their business strategy, operations, or finances. Large companies must report their Scope 1 and Scope 2 emissions if they are material to the company, but not Scope 3. Among other required disclosures, companies must report if they have climate targets or goals and how these climate targets or goals will materially affect their business and finances. Companies must start reporting for 2025, but implementation is uncertain at this point because of the Commission’s stay.
In Australia, the country’s Senate passed legislation that requires companies with over 500 employees, revenues over AUD 500 million or assets over AUD 1 billion, and asset owners with more than AUD 5 billion in assets, to begin reporting climate risks starting in 2025. The legislation would require a phased-in approach for Scope 3 reporting. This action complements work by the Australian Accounting Standards Board, the country’s government agency that oversees financial reporting, to require large businesses and financial institutions to disclose their annual GHG emissions, emissions targets, and actions to curb climate change.
Singapore has moved forward with its mandatory climate-related disclosures, strengthening its regulatory framework and allowing for a phased-in approach. Regulators in Singapore are requiring mandatory climate-related reporting for public and large private companies, with standards aligned with the International Financial Reporting Standards (IFRS) and the International Sustainability Standards Board (ISSB). Singapore is phasing in regulations to include reporting on Scopes 1, 2 and 3 emissions, with most implementation occurring from 2025-2027.
In Hong Kong, new rules for mandatory climate-related disclosures related to companies’ governance procedures, risks and opportunities, resilience to climate change, and worker compensation will begin in 2025. The disclosures, which will be required for all issuers on the Stock Exchange of Hong Kong, must include Scopes 1 and 2 for all issuers and Scope 3 for Large Cap issuers.
Examples of Supply Chain Due Diligence Implementation
Governments are also increasingly adopting regulations to increase supply chain due diligence, requiring companies to evaluate and mitigate risks in their supply chains, particularly concerning human rights abuses and environmental violations. To conduct effective due diligence and avoid potential sanctions, companies need to monitor supply chains, review their activity, and identify future risks. A cornerstone of due diligence frameworks is the traceability of commodities and raw materials, which will be crucial to ensuring that companies avoid supporting environmental degradation, including deforestation. In addition to the possibility of fines and violations, reputation risks for companies are also likely if they violate due diligence requirements, undermining their brand image with sellers, consumers, and regulators.
In New York State, the Tropical Rainforest Economic & Environmental Sustainability (TREES) Act was introduced in 2024. This legislation, which has passed the state legislature, would require government contractors to show that their supply chains do not contribute to deforestation. To show that their products are not linked to deforestation, contractors would have to provide data to the state authorities that demonstrate supply chain due diligence to the points of origin. Commodities covered by the law include soy, beef, palm oil, coffee, cocoa, wood pulp, paper and wood products. The TREES Act comes after the New York Tropical Deforestation-Free Procurement Act, passed the New York State Legislature but was vetoed by the Governor at the end of 2023. The TREES Act includes modifications that take into account the Governor’s concerns.
New York hopes to have more success than California, where a similar bill passed the state legislature in 2021 but was vetoed by Governor Gavin Newsom. The California Deforestation-Free Procurement Act was re-introduced in 2022 but has still not become law. In the United States at the federal level, the Fostering Overseas Rule of law and Environmentally Sound Trade (FOREST) Act, which aims to limit the United States’ imports of commodities from illegally deforested land, has still not gained enough traction to move through Congress. Commodities covered in the bill are cattle, palm oil, soybeans, rubber, cocoa, and wood pulp. Under the bill, importers would have to show that their products are deforestation-free, increasing reporting requirements for companies about their supply chains. Imports of the listed commodities would only be permitted if the importer includes sufficient information to show that the entire supply chain is deforestation-free.
More Rules Likely as Climate Risks Grow
As these recent developments show, governments are moving forward on climate-related disclosures and supply chain regulations, even if some of the new rules and reporting requirements are moving forward slower than others and vary from jurisdiction to jurisdiction. Regulators understand that climate change is affecting business performance, making reporting on climate-related risks important for policymakers, companies, and investors. More and more jurisdictions will likely follow in the footsteps of those that have already adopted regulations.
As more governments adopt reporting requirements for climate-related disclosures and supply chain risks, companies are adjusting to the new rules as they understand that these regulations are here to stay. For investors, through these rules, they are starting to see more and more how climate change is a growing risk to companies while also providing opportunities. Companies will need to continually adjust as climate transition risks materialize for high-emission sectors and countries while reporting requirements in more and more jurisdictions kick in.