The SEC and EU Release New ESG Regulations: How Will Government Contractors be Impacted?

At a glance

• Main takeaway: The SEC and EU have announced new regulations that will require government contractors to increase their transparency on ESG-related matters, including emissions disclosures, corporate social responsibility and financial performance.
• Impact on your business: As ESG regulations continue to grow, it’s critical for government contractors to evaluate their current ESG competence and set realistic objectives to meet these new standards.
• Next steps: Aprio’s ESG Advisory team can guide you through the impact of these new regulations and help your business achieve ESG compliance.

Let Aprio get you started on your ESG journey? Contact our team for a complimentary consultation.

The full story:

Government contractors are no strangers to complying with strict regulations. However, several upcoming environmental, social and governance (ESG) regulations from the Security and Exchange Commission (SEC) and the European Union (EU) could impact government contractors’ ability to bid on future contracts.  

Below we breakdown the new SEC and EU regulations and how they will directly affect government contractors:

SEC urges government contractors to prepare ESG-related data

In April 2023, the SEC plans to release new regulations requiring public companies to expand their climate-related disclosures. According to a press release from March 2022, registered companies will need to disclose their direct (Scope 1) and indirect (Scope 2) greenhouse gas (GHG) emissions starting in the 2024 fiscal year.

• Direct emissions (Scope 1) are classified as everything the business owns or controls.
• Indirect emissions (Scope 2) are activities that support the business but are outside of direct control.
• Registrants must also disclose their upstream and downstream (Scope 3) activities in their value chain if material to the company or if they have set GHG emissions targets.

In addition to these new climate regulations, the SEC has also proposed new cybersecurity reporting rules, and will include human capital and board diversity as required disclosures before the end of the year.

While private companies do not have to currently follow the SEC’s regulations, the Federal Government signed an executive order directing the Federal Acquisition Regulations (FAR) Council to consider amending the requirement for major suppliers to disclose their emissions and reduction targets to qualify for upcoming contracts. The due date for a final draft was February 22, 2023.

So, how can government contractors prepare as they now face a new urgency over managing climate-related data? The key element is to ensure transparency in the emissions disclosures. Achieving sustainability goals won’t happen overnight, so it is important to take action now. It is imperative that government contractors evaluate their current ESG practices, focus on compiling emissions data to quantify their carbon activity and set reduction targets. 

EU’s bold ESG plan for government contractors

The EU has been diligently working on an ambitious plan to expand its requirements on ESG reporting since April 2021. The new Corporate Sustainability Reporting Directive (CSRD) will drastically increase the current nonfinancial reporting obligations and require much more detailed disclosure of ESG topics for nearly 50,000 companies operating in the EU, including “private non-EU companies that meet certain threshold presence.” This is a massive increase from the 11,700 companies last year.

In comparison to the proposed regulations that will come out this spring from the SEC in the US, the new EU rules for 2024 will include disclosures of all material information on impacts, risks, strategies and opportunities, as well as double-materiality (convergence of sustainable impact and value creation). In other words, companies now need to examine their sustainability impact on environmental matters plus their corporate social responsibility and financial performance. 

Given the increased requirements, US issuers should anticipate the impact if they are part of the value chain of a company doing business in the EU. Thus, even if a US company is not listed on a European exchange, they may be required to produce ESG reports in compliance with EU regulations. The current criteria to determine who should comply with the CSRD for EU and non-EU companies operating in the Union, are companies with more than:

• 250 employees,
• €40million in revenue and
• €20 million in assets.

All companies with securities listed on the EU market are also required to comply. 

The bottom line

While many government contractors are now preparing for the SEC regulations to take effect, preparation for reporting under the new EU rules will be an essential topic this fall. Boards and corporate governance committees must evaluate their competency and capacity to oversee ESG-related matters. 

Aprio’s ESG Advisory team has experience helping government contractors achieve ESG-related compliance. To learn more about how the regulations from the SEC and EU will impact your business, contact our team for a complimentary consultation.

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About Aprio’s ESG Practice

Let Aprio get you started on your ESG journey? Contact our team for a complimentary consultation.