Mandatory Climate Reporting: Implications for Private Equity
Article
How do the new climate regulations affect private companies?
New and expected climate risk disclosure regulations from the EU, the US Securities & Exchange Commission (SEC), and the state of California create new requirements and value creation opportunities for private equity (PE) portfolio companies. Whether in the due diligence phase, as part of ongoing management, or as part of your exit/IPO strategy, understanding the climate compliance needs of portfolio companies is more important than ever.
How do the new climate regulations affect private companies?
- Broad scopes: Both the EU’s Corporate Sustainability Reporting Directive (CSRD) and California’s newly passed Climate Corporate Data Accountability (SB 253) and Climate-Related Financial Risk Acts (SB 261) apply to private companies above certain size thresholds.
- Customer demand: Due to these laws, more than 60,000 companies globally are now subject to carbon risk and emissions disclosure requirements that include material Scope 3 greenhouse gas emissions (indirect value chain emissions). This means that all suppliers to these companies – including private ones – will need to develop carbon emissions baselines.
- Future-proofing: US portfolio companies not otherwise currently impacted would still be subject to the proposed SEC regulations if they IPO, where this information would be required for the IPO registration statement.
A quick overview of relevant regulations:
| European Union’s Corporate Sustainability Reporting Directive (CSRD) | California’s Climate Disclosure Laws | SEC’s Proposed Climate Disclosure Rule | |
|---|---|---|---|
| Scope of coverage | 1) Companies listed on EU-regulated markets; 2) Large EU companies, both listed and unlisted, including large subsidiaries of non-EU companies; 3) SMEs listed in the EU; 4) Non-EU parent companies with more than €150 million in annual EU revenue.
~50,000 EU companies and ~10,000 non-EU companies (1/3 of those U.S. co’s) |
Public & private companies (including LLCs and partnerships) organized in the United States and “doing business in California.”
SB 261: >$500 million revenue (~10,000 companies) SB 253: >$1 billion revenue (~5,000 companies) |
SEC registrants (mostly companies with U.S. public equity listings, including foreign private issuers).
~8,000 companies |
| Information required | Broad range of sustainability topics including climate. Unique double materiality threshold.
Emissions reporting subject to (double) materiality determination. |
SB 261: Biennial preparation and publication of a TCFD-aligned risk report.
SB 253: Annual Scopes 1-3 emissions data. Emissions data required regardless of materiality determination. |
Climate-related risks, primarily through the lens of traditional financial materiality.
Scope 1-2 emissions; Scope 3 if material or if the company has set a target. |
| Status | Implementation ongoing; first round of companies will report on 2024 data. | Signed by Governor Newsom; pending regulatory implementation. | Pending finalization and adoption. |
To sum things up, what do these new regulations mean for private equity?
- Start assessing now: General Partners should assess the climate regulatory exposure of their current holdings and those that are in the due diligence phase.
- Drive forwards with data: Building off that analysis, the next step is to develop a data strategy for measuring, managing and disclosing greenhouse gas (GHG) emissions both at the portfolio company and fund/portfolio levels. See ADEC’s GHG Data Guide for Private Equity to get started.
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