Climate Change and Corporate Governance: Navigating 2025 and Beyond

As we begin 2025, the effects of climate change are becoming increasingly visible, not only in the natural environment but also in the regulatory and corporate governance landscape. Directors and management teams across the globe are facing complex new requirements that require companies to focus attention on sustainability, transparency, and corporate responsibility. In this context, the European Union’s Corporate Sustainability Reporting Directive (CSRD), the SEC’s proposed climate rule, and California’s Climate Corporate Data Accountability Act present challenges and opportunities for boards and management teams.

The scope of CSRD is far-reaching and will affect many US-based companies with activities in the European Union (EU). Understanding their interconnectedness is critical for corporate leaders in ensuring long-term success and compliance while embedding sustainability into risk management and strategic planning.

CSRD and Double Materiality: Understanding the European Framework

CSRD represents a significant shift in how companies disclose their environmental, social, and governance (ESG) data. CSRD introduces rigorous reporting standards that apply to a wider range of companies, including non-EU businesses with substantial operations in Europe. One of the directive’s key features is its focus on double materiality. Double materiality goes beyond the traditional financial materiality concept that boards and management are familiar with and assesses impact materiality. Impact materiality refers to the company’s influence on society and the environment, which can even potentially affect a company’s bottom line.

Under this framework, companies must consider how ESG factors impact their financial performance (financial materiality) and how their operations impact society and the environment (environmental and social materiality). For example, a company must report not only on how climate change might affect its assets but also on how its carbon emissions contribute to global warming.

The CSRD’s double materiality standard introduces complexities for US and global companies operating in or with substantial connections to Europe. As the directive takes effect in 2025, US companies (particularly multinational corporations that meet EU revenue and turnover thresholds) will need to align their reporting practices with the CSRD, even if they are headquartered outside the EU. This creates challenges in terms of reconciling different regulatory frameworks and ensuring consistency in ESG reporting across jurisdictions.

Beyond Europe: The Impact of CSRD on the United States

The CSRD’s application will not be limited to companies with a meaningful presence in Europe; its impact will reverberate across global markets. As companies operating within the EU adapt to this standard, it will inevitably influence global supply chains, investment decisions, and reporting expectations. The ripple effect of European regulations often sets the stage for global market practices, meaning that US companies must be prepared for the indirect consequences of CSRD, even if they are not directly subject to it. US companies that fulfill revenue and turnover thresholds will be subject to CSRD. Additionally, US companies may be required to provide information to reporting companies within their supply chain even if the company itself is not in CSRD scope, impacting both public and private companies across varying industries.

US regulators, notably the Securities and Exchange Commission (SEC), have proposed their own climate disclosure rules, which share similarities with the CSRD in terms of reporting environmental risks. While the SEC rule focuses on financial materiality, requiring companies to disclose how climate risks impact their financial health, the CSRD’s double materiality approach asks for a broader scope of accountability. For corporate directors, this means oversight of management’s capacity to respond and harmonize reporting across multiple regulatory frameworks.

Moreover, California’s Senate Bill 219 (Greenhouse gases: climate corporate accountability: climate-related financial risk) was signed into law in late September 2024, making slight tweaks to the Climate Accountability Act (SB 253 and SB 261), signed into law in 2023. Senate Bill 219 will award more flexibility to companies as it delays some compliance dates. The prospect of pending litigation upon these requirements adds another layer of complexity for businesses operating in or selling to the state and is all the more reason to stay abreast of evolving regulatory matters.

This law mandates climate disclosures akin to the CSRD and the SEC’s proposed rules, particularly in requiring companies to report on their carbon emissions, including Scope 3 emissions. Scope 3 emissions, which encompass indirect emissions across a company’s value chain, are the most difficult to measure due to their complexity, data gaps, and involvement of multiple external stakeholders. Under the CSRD framework, accurately reporting double materiality will be crucial to understanding both the financial risks from value chain emissions and the company's broader environmental impact through its operations. As California often sets trends in environmental legislation later adopted at the federal level, companies must remain proactive in anticipating and aligning with these overlapping regulations.

Challenges for Board and Management Teams

Compliance with the CSRD and other evolving climate regulations presents numerous challenges for boards and management teams. These challenges are not only legal and technical but also strategic in nature.

1. Data Collection and Reporting Infrastructure: One of the most immediate challenges is building the necessary infrastructure to collect and report ESG data. Under the CSRD, companies will need to report more granular information, which will require robust data management systems. For companies that are not already tracking environmental and social data at the required level, this will mean significant investment in innovative technologies and processes, to ensure the quality and integrity of disclosures. Additionally, Scope 3 emissions can be particularly challenging to measure accurately.

2. Capacity Building and Climate Fluency: Boards and management teams will need to develop a deeper understanding of sustainability risks and opportunities. Many corporate leaders have focused historically on financial performance, but the CSRD and other climate regulations demand fluency in areas such as climate science, sustainability reporting standards, and stakeholder engagement. Boards are not expected to be climate and sustainability experts but rather expected to receive high-level education sessions and frequent reporting on the company’s progress on these topics. This will require boards to continuously build their competencies and potentially bring in outside experts to ensure they are equipped to oversee ESG reporting and strategy effectively.

3. Legal Risks and Compliance Costs: Failure to comply with the CSRD or similar regulations can expose companies to legal risks, including fines and litigation. Compliance costs, particularly for multinational companies operating in multiple jurisdictions with varying climate regulations, are also a significant concern. Additionally, companies may be asked to provide information to other companies that also have to comply with the regulations. However, boards must weigh these costs against the risks of noncompliance, which could include reputational damage and exclusion from investment portfolios that prioritize ESG criteria. Disclosing too much information that is not backed by a consistent narrative presents reputation risks (greenwashing) if companies are overpromising and underdelivering.

Beyond Compliance: Value Creation and Risk Mitigation

To effectively manage the risks and opportunities presented by climate change, companies must integrate climate considerations into their enterprise risk management (ERM) processes. Rather than viewing compliance as a “check-the-box” exercise, boards and management teams can undergo risk assessments, scenario planning, and oversight exercises. Climate Risk Assessments evaluate how physical climate risks (such as extreme weather events) and transition risks (such as regulatory changes) could impact the company’s operations, supply chain, and financial performance. Boards should ensure that these risks are regularly reviewed and that the company has contingency plans in place. By amplifying sustainability efforts beyond mere compliance, companies can unlock significant financial, operational, and strategic advantages while positioning themselves as leaders in the global transition to a more sustainable economy. (See NACD’s “Integrating Climate into Strategy and the Organization.”)

While the regulatory requirements of the CSRD, SEC climate rule, and California’s Climate Corporate Data Accountability Act may seem burdensome, they also present opportunities for value creation. Corporate leaders who view these regulations as more than just a compliance exercise can leverage them to enhance their company’s long-term sustainability, brand reputation, and competitiveness.

1. Enhancing Corporate Reputation: Companies that engage with climate regulations and ESG disclosures can position themselves as industry leaders in sustainability. As consumers, investors, and stakeholders increasingly prioritize environmentally responsible companies, businesses that commit to reducing their environmental impact can gain a competitive edge. Companies that demonstrate strong ESG performance often enjoy greater brand loyalty, which translates into customer and employee retention, premium pricing, and a reduced cost of capital. Additionally, a well-managed reputation can protect a company from public relations crises relating to social and environmental scandals, thus safeguarding long-term value and market share.

2. Attracting Investment: Institutional investors place growing importance on ESG factors when making investment decisions. By complying with regulations and demonstrating transparency in their environmental impact, companies can demonstrate to investors that management has identified the sustainability issues most relevant to the business and its stakeholders and thus attract capital from the growing pool of ESG-focused investors and institutional funds. Studies have shown that companies with strong ESG performance often outperform their peers overall, both financially and in terms of risk mitigation.

3. Driving Innovation and Efficiency: Complying with the CSRD requires companies to assess their entire value chain, including energy consumption, waste production, and carbon emissions. This can lead to the identification of inefficiencies and opportunities for innovation. Companies that invest in renewable energy, circular economy practices, and sustainable supply chains can reduce their environmental impact and operational costs, improve margins, and decrease their dependence on volatile energy markets. Additionally, sustainability initiatives can spur innovation, such as developing new, eco-friendly products or services that open new revenue streams and increase market share in the growing green economy.

4. Mitigating Long-Term Risks and Seizing Opportunities: By embedding climate considerations into strategic decision-making, companies can better prepare for future risks while also identifying ways to capitalize on opportunities in the emerging low-carbon economy. This proactive approach to ESG risks can lead to greater operational resilience and prevent costly disruptions. Moreover, companies that are ahead of the curve in addressing environmental concerns may avoid the heavy fines, legal costs, and reputational damage that come with noncompliance or reactive management. This stance protects shareholder value, reduces premiums, and ensures continued access to capital markets, where sustainability risks are increasingly assessed a higher cost.

The Role of Directors in Shaping the Future

Looking ahead to 2025 and beyond, directors have a critical role to play in shaping how their companies navigate the evolving climate landscape. The interplay between the CSRD, SEC climate rule, and California Climate Corporate Data Accountability Act signals a global shift toward greater accountability and transparency in corporate climate actions. Rather than approaching these regulations as separate mandates, forward-thinking boards will recognize the need for a cohesive, global strategy that aligns with best practices in sustainability reporting and risk management.

As more countries adopt their climate regulations, there is an increasing need for harmonization across different reporting frameworks. The International Sustainability Standards Board (ISSB) is one framework that works to accomplish this by reducing complexity across the various reporting channels. Boards can support initiatives that seek to create a unified global standard for ESG reporting, which would reduce the burden of compliance for multinational corporations and enhance comparability for investors. It will also be crucial for directors to take a proactive approach to engaging with stakeholders—including investors, employees, and customers—on climate change. Understanding the evolving expectations of these groups will be essential for maintaining trust and ensuring long-term business success.

Ultimately, the companies that succeed in the future will be those that view climate change not just as a risk to be managed but as an opportunity for innovation and leadership. By embracing the requirements of the CSRD, SEC climate rule, and California Climate Corporate Data Accountability Act, boards can help drive meaningful progress toward a more sustainable future.

The challenges and opportunities presented by these climate change regulations demand a strategic response from corporate boards and management teams. By understanding the nuances of these regulations, embedding climate considerations into ERM, and viewing compliance as an opportunity rather than a burden, companies can position themselves for long-term success in a rapidly changing regulatory environment. Corporate directors have a responsibility to ensure their organizations not only meet the evolving legal standards, but also leverage these frameworks to drive innovation, efficiency, and enhanced reputational value. By embedding sustainability into governance structures and strategic planning, boards can lead their companies in mitigating risks, seizing opportunities, and contributing to a resilient and sustainable global economy in 2025 and beyond.

Lastly, effective board oversight is critical to ensuring that climate risks are addressed at the highest levels of the company. This may require the creation of dedicated ESG committees or the integration of ESG issues into existing audit and risk committees. Boards should also establish clear lines of responsibility for managing climate risks and ensure that management teams are held accountable for progress on sustainability initiatives.

Questions Directors Can Ask

1. How is the company ensuring they provide consistent climate-related disclosures across different regulatory frameworks to safeguard against discrepancies?

2. What measures are being taken to engage with suppliers and partners to secure accurate ESG data, particularly for Scope 3 emissions, and how are any potential gaps in their reporting capabilities being addressed?

3. How actively is the company engaging with key stakeholders, particularly investors, to understand their expectations around climate transparency? What strategies are employed to communicate sustainability progress effectively to these groups?

4. How does the board use ESG data to understand management’s progress in addressing sustainability risks and opportunities?