Clark Hill 2024 Automotive & Manufacturing Industry Outlook: ESG & Sustainability

In 2024, we continue to see many developments related to Environmental, Social, and Governance (ESG) and sustainability, adding to and expanding upon many of the trends and challenges we saw in 2023. As both “pro” and “anti” ESG proposals continue to ramp up this year, companies face an increasingly complex patchwork of law and policy that must strategically plan for and navigate, particularly when doing business in different jurisdictions. This article focuses on one key trend, mandatory corporate disclosures; however, there are plenty of other topics, including greenwashing scrutiny, that will continue to demand the attention and efforts of companies around the world this year.

Climate Change Disclosure Mandates

Capturing many headlines is the topic of mandated corporate disclosures regarding climate risks and opportunities, as new requirements emerge on the international, federal, and state levels. In the United States (U.S.), late 2023 and early 2024 saw the adoption of two major climate change disclosure mandates—on the federal level, the U.S. Securities Exchange Commission (SEC) Final Rules on “The Enhancement and Standardization of Climate-Related Disclosures for Investors”, and, on the state level, California’s “Climate Corporate Data Accountability Act” (SB 253) and “Climate-Related Financial Risk Act” (SB 261) (together known as the Climate Accountability Package). The Climate Accountability Package, passed ahead of the SEC’s Final Rules, created the nation’s first requirements for large corporations that do business in California to publicly disclose their greenhouse gas emissions (GHG), carbon embedded in supply chains, and climate risks. It also goes beyond the SEC’s Final Rules by applying to both public and privately-held companies and requiring reporting on Scope 1 (direct), Scope 2 (purchased energy), and Scope 3 (supply chain) GHG emissions, whereas the SEC’s Final Rules only apply to public companies and foreign private issuers and do not include Scope 3 emissions.

Both the Climate Accountability Package and SEC’s Final Rules quickly faced legal challenges in court that may impact their final forms and/or their implementation timelines. This creates uncertainty and confusion for businesses potentially subject to these mandates, and in fact, to avoid regulatory uncertainty, the SEC chose to stay its Final Rules pending judicial review. Regardless of legal challenges, however, the global trend appears to be increasingly towards climate change disclosure mandates, from state-level proposals (e.g., Illinois and New York) to international laws (e.g., the European Union (E.U.) Corporate Sustainability Reporting Directive (CSRD)).

CSRD went into effect on January 1, 2024, and the first tier of companies subject to it will be required to report in 2025, covering 2024 fiscal years. CSRD enhances its predecessor, the Non-Financial Reporting Directive (NFRD), by establishing more stringent reporting criteria and expanding the scope of companies that must report. Some 50,000 companies that do business in the EU are expected to gradually fall under the scope of CSRD, including U.S. businesses with E.U. subsidiaries or branches that meet CSRD’s size and reporting criteria. Additionally, since CSRD includes Scope 3 emissions disclosure requirements, organizations upstream and downstream from companies doing business in the E.U. will be affected, as those in-scope companies look to comply with their Scope 3 reporting obligations.

Other ESG Disclosure Mandates

Climate change disclosures are not the only focus area when it comes to ESG reporting mandates, however; in fact, CSRD requires reporting on risks and opportunities arising from both environmental and social issues. Also in the E.U., the European Commission recently approved the Corporate Sustainability Due Diligence Directive (CSDDD), which will go next to the European Parliament for consideration. CSDDD sets mandatory obligations for large companies operating in the E.U. to address their actual and potential negative impacts on human rights and the environment, including new due diligence requirements that apply to their own operations, those of their subsidiaries, and those carried out by their business partners. Three years after CSDDD enters into force, it would apply to non-E.U. companies that have over €150 million net turnover generated in the E.U.—the European Commission is expected to publish a list of non-E.U. companies that fall under the scope of CSDDD.

CSDDD’s focus on supply chain diligence related to human rights and other “S” aspects of ESG is not totally unique. Globally, over the past several years, there has been a rise in new laws and regulations aimed at combatting human rights issues in supply chains, particularly forced labor, an issue of particular concern for the automotive manufacturers. For example, Canada’s “Fighting Against Forced Labour and Child Labour in Supply Chains Act” came into force on January 1, 2024, requiring covered Canadian entities to file annual, board-approved reports that details their efforts to prevent and mitigate forced labor and child labor in their supply chains. It includes severe penalties for non-compliance, including fines up to CAD 250,000 and potential liability of directors, officers, agents, or other decision makers.

In the U.S., similar laws have been enacted, including California’s “Transparency in Supply Chains Act”, which went into effect on January 1, 2012, and applies to large retail sellers or manufacturers doing business in California. More recently, the federal Uyghur Forced Labor Prevention Act” (UFLPA) went into effect June 21, 2022, creating a rebuttable presumption that all goods produced in the Xinjiang Uyghur Autonomous Region (XUAR) of Western China are made with forced labor and therefore are ineligible for entry into the U.S. These and other developments highlight the growing scrutiny on companies’ global supply chains, whether on GHG emissions, human rights concerns, or other ESG-related criteria. This scrutiny is increasingly manifesting as mandatory disclosures aimed at increasing transparency and comparability between businesses.

Wait and See?

As companies face a fragmented and evolving legal landscape related to ESG and sustainability, especially mandatory disclosures, it may be tempting to simply wait and see where requirements eventually land. This approach may leave companies ill-prepared, however, especially where mandated disclosures require significant data gathering and analysis with relatively eminent deadlines. Instead, companies should strategically prepare using a risk-based approach, prioritizing those areas that may create the most exposure for their business and continuing to adhere to the corporate governance adage, “Say what you do, and do what you say.”

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