Domestic and Overseas Climate Disclosure Standards and Policy Trends

ESG management requires the consideration of various factors from the perspectives of the environment, society and governance. Among other things, the “environment (E)” factor – more specifically a response to climate change – has been drawing attention as a key sector for ESG management. Many countries (including Korea) are in the process of establishing various disclosure schemes to ensure that, with respect to companies’ climate change-related risks and opportunities, relevant information be shared with relevant stakeholders (including investors) in a reliable and effective manner.

International climate disclosure standards may have a direct impact on companies that are either operating in the respective country or listed in the respective stock market. Even if Korean companies are not directly subject to those standards, Korean companies in a cooperative/transactional relationship with companies overseas may be indirectly affected by such standards. Therefore, we have summarized the major overseas and domestic climate disclosure standards that are currently being discussed.

1.	International Trends

(1)

Comparison Among Climate Disclosure Standards

There are three global climate disclosure standards that were recently introduced: (i) the United States Securities and Exchange Commission’s (“SEC”) Rules to Enhance and Standardize Climate-Related Disclosures for Investors (“Climate-related Disclosure Regulations”), (ii) the EU’s Corporate Sustainability Reporting Directive (“CSRD”) standards, and (iii) the International Financial Reporting Standards S2 (“IFRS S2”) Climate-related Disclosures by the International Sustainability Standards Board (“ISSB”). Below is a table that shows comparisons between these disclosure standards.

Classification	US SEC Climate-related Disclosure Regulations	EU CSRD Standards	ISSB’s IFRS S2 Climate-related Disclosures
Announcement Date or Effective Date	The final draft was passed on March 6, 2024. The regulations will become effective after 60 days from the date of promulgation.	The CSRD became effective on January 5, 2023. The first set of the European Sustainability Reporting Standards (“ESRS”) was announced on January 1, 2024. Each EU Member State is obligated to enact its own law by July 6, 2024.	IFRS S2 was announced on June 26, 2023.
Subject of Application and Timing	Listed conglomerates: Fiscal year beginning in the calendar year 2025 for filings in 2026. Later, the scope will be expanded to listed mid-sized companies, listed small-sized companies, smaller reporting companies and emerging growth companies.	Non-EU companies: Among listed companies in the EU, large companies with more than 500 employees or parent companies of large conglomerates with more than 500 employees are subject to the standards as of January 1, 2024 (information to be disclosed in 2025). The scope is to be expanded. EU companies: Among public-interest entities, large companies with more than 500 employees, or parent companies of large conglomerates with more than 500 employees sre subject to the standards as of January 1, 2024 (information to be disclosed in 2025). The scope is to be expanded.	Fiscal year beginning in the calendar year 2024 for filings in 2025, provided, however, that each country shall determine its own implementation. The obligation to disclose Scope 3 emissions will be subject to a grace period of one year (information to be disclosed in 2026).
Key Disclosure Requirements	Regulation S-K Item 1500: Climate-related disclosures in regular reports and registration statements – for listed large companies and listed mid-sized companies, Scope 1 and Scope 2 emissions need to be disclosed if they are deemed material. Regulation S-X Article 14: Disclosure of climate-related footnotes in financial statements (including the impact of severe weather events and other natural phenomena on the financial statements).	Information regarding sustainability matters will need to be disclosed. Examples include (i) a company’s impact on sustainability matters, and (ii) the impact of the sustainability matters on the development, performance and position of the company. The authority to set forth details is delegated to the ESRS.	IFRS S2 Climate-related disclosures: climate-related governance structure, strategies, risk management, indicators and objectives (including Scope 1, 2 and 3 emissions).
Characteristics	Scope 3 emissions are excluded from the disclosure requirement (unlike the first draft announced in 2022, the final rules eliminated Scope 3 emissions disclosures). Ten states have filed lawsuits against the SEC, and the United States Court of Appeals for the Fifth Circuit granted a stay.	First set of the ESRS: Climate change (E1), which was subject to mandatory disclosure in the draft published in 2022 regardless of the results of a materiality assessment, has been converted to a voluntary disclosure. Second set of the ESRS: This is applicable depending on the industry type and business type, and the European Commission plans to announce it by June 2026.	Countries that have been subject to the IFRS (including Korea) are considering adopting the ISSB disclosure standards.

(2)

United States SEC Climate-Related Disclosure Regulations

The United States SEC’s Climate-related Disclosure Regulations, which were finalized on March 6, 2024, will become mandatory (in phases) starting in 2026, with the focus on large listed companies (known as Large Accelerated Filers). Subject companies are required to disclose certain non-financial information, including climate-related governance, climate-related risk impacts on strategic and business models and prospects, climate-related risk management, and climate-related indicators and objectives. In particular, if the amount of greenhouse gas emissions (Scope 1 and 2) is deemed material, such amount should be also disclosed. If the emission of a certain greenhouse gas is deemed individually material, the level of emissions of that particular greenhouse gas should be disclosed in detail.

Third-party assurance on the information relating to greenhouse gas emissions is also required, and the level of required assurance will vary depending on the size of company. Specifically, limited assurance will be required for large listed companies (“Large Accelerated Filers”) for data from 2029 onwards (for filings in 2030), and reasonable assurance will be required for data from 2033 onwards (for filings in 2034), while for listed mid-sized companies (known as “Accelerated Filers”), only limited assurance will be required for data from 2031 onwards (for filings in 2032).

(3)

EU CSRD and ESRS E1 (Part of the First Set of ESRS)

The CSRD announced by the EU will be applied, in phases, to EU and non-EU companies that meet certain criteria, starting from the fiscal year that begins after January 1, 2024. However, as the CSRD is legislated in the form of a directive (guideline) rather than a regulation, it is not directly binding on EU Member States. Accordingly, each EU Member State is obligated to enact a local legislation consistent with the CSRD within 18 months from the effective date (i.e., by July 6, 2024).

The CSRD prescribes the entities subject to the disclosure requirements, and methods, principles and procedures of disclosure. The details to be disclosed are stipulated in the ESRS, which is the CSRD’s subordinate regulation. On July 31, 2023, the EC announced the first set of the ESRS (cross-sectoral disclosure standards applicable to all industries), which became effective on January 1, 2024.

The ESRS E1, which is a standard for climate change disclosure and part of the first set of the ESRS, sets forth a total of nine disclosure requirements, including the requirements for Scope 1, 2 and 3 emissions, total greenhouse gas emissions (Disclosure Requirement E1-6), total greenhouse gas emissions reduced or eased by purchasing carbon credits (Disclosure Requirement E1-7), and internal carbon price (Disclosure Requirement E1-8).

Companies are free to decide whether to make disclosures based on the materiality assessment of the ESRS E1 disclosure requirements. However, when excluding such disclosures, they need to explain the materiality assessment results in detail.

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ISSB’s IFRS S2 Disclosure Standards

The final drafts of the IFRS S1 and IFRS S2 announced by the ISSB in June 2023 went into effect on January 1, 2024. In particular, the IFRS S2 (climate-related disclosure standards) requires companies to make climate-related financial disclosures, such as governance and strategies, risk management, indicators and objectives. With respect to indicators and objectives, companies are required to disclose the information regarding cross-industry metrics as well as industry-based metrics that were established by referring to the standards of the existing Sustainable Accounting Standards Board. The cross-industry metrics include Scope 1, 2 and 3 emissions. However, the obligation to disclose Scope 3 emissions is subject to a one-year grace period (such information will be subject to disclosure from 2026). In addition, the ISSB’s IFRS S2 requires the disclosure of climate-related targets set by companies.

2.	Domestic Trends

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Comparison Between Climate Disclosure Systems

In line with the global movement of mandatory climate-related disclosure, there are climate disclosure systems that are under discussion to be introduced or reformed in Korea: (i) the Sustainability Disclosure System led by the Financial Services Commission (“FSC”), and (ii) the Environmental Information Disclosure System under the jurisdiction of the Ministry of Environment (“MOE”). The following table includes the key details of these two systems.

Classification	Sustainability Disclosure System	Environmental Information Disclosure System
Responsible Agency	FSC	MOE
Effective Date	The system will be introduced after 2026. The specific timing is to be determined after discussions with the relevant ministries.^[1]	The reformed system is scheduled to be implemented in phases starting from January 1, 2024. Listed companies with consolidated total assets of at least KRW 2 trillion will be required to disclose the climate-related information from 2024 onwards (for filings in 2025).
Key Disclosure Requirements	The draft sustainability disclosure standards in Korea were announced on April 30, 2024. Climate-related disclosures (Article 2): information on governance, strategy, risk management, metrics and goals for climate-related risks and opportunities must be disclosed.	2024 mandatory disclosure items for listed companies with consolidated total assets of at least KRW 2 trillion (to be disclosed in 2025): greenhouse gas emissions (Scope 1 and 2), renewable energy consumption, use/recycling rate of plastic renewable materials, the amount of water usage in water-stressed areas, etc. Expansion of mandatory disclosure items (for example, Scope 3 emissions, use of circular raw materials, status of biodiversity-sensitive areas, performance indicators related to the K-Taxonomy, etc.) are under review.

(2)

Announcement of Draft Sustainability Disclosure Standards in Korea

The FSC has been seeking to make ESG information disclosure mandatory for KOSPI-listed companies of a certain size starting from 2026, ultimately expanding the scope of application to all KOSPI-listed companies. In doing so, on April 30, 2024, the Korea Sustainability Standards Board (“KSSB”) under the Korea Accounting Standards Board announced draft sustainability disclosure standards.

According to the draft sustainability disclosure standards, information on sustainability-related risks and opportunities must be disclosed based on four key factors: governance, strategy, risk management, and metrics/goals. For climate-related risks and opportunities, information must be disclosed pursuant to the disclosure requirements for key factors stipulated under Article 2.^[2] Although disclosure of information on non-climate-related sustainability risks and opportunities (e.g., biodiversity, pollution, water and ocean resources, and human rights) is optional,^[3] disclosure of information on climate-related risks and opportunities is mandatory.^[4]

The draft disclosure standards did not specify when it will take effect.^[5] However, the final disclosure standards are expected to be announced during the second half of 2024 after undergoing a public comment period from May 1, 2024 to August 31, 2024. Therefore, it is advisable for companies to actively provide comments during the public comment period and closely monitor the legislative trends on mandating ESG disclosure standards based on the final draft.

(3)

Reform of Environmental Information Disclosure System

The Environmental Information Disclosure System established pursuant to Article 16-8 of the Environmental Technology and Industry Support Act has been reformed to enhance its consistency with the global ESG disclosure standards as of January 1, 2024. Starting from 2024 (for filings in 2025), listed companies with total assets of at least KRW 2 trillion on a consolidated basis are required to disclose their greenhouse gas emissions (Scope 1 and 2), renewable energy consumption, use/recycling rate of plastic renewable materials, and the amount of water usage in water-stressed areas.

In addition, the MOE has been considering the following measures: (i) with respect to greenhouse gas emissions (Scope 1 and 2) and renewable energy consumption, expanding the disclosure requirements beyond listed companies with total assets of at least KRW 2 trillion on a consolidated basis to all companies subject to the disclosure system, and (ii) mandating that all listed companies with total assets of at least KRW 2 trillion on a consolidated basis disclose their Scope 3 greenhouse gas emissions, the use of circular raw materials, the status of biodiversity-sensitive areas, and performance indicators related to the K-Taxonomy.

Implications for Korean Companies

Companies may be unsure about what standards they need to adhere to when setting up a compliance system for climate disclosure, because the regulations for each climate disclosure standard vary from one country to another in terms of the scope and items required for disclosure. Therefore, it is necessary to establish an effective climate data collection and disclosure system by analyzing the level of demand as well as similarities and differences among applicable disclosure standards. In particular, in establishing a climate disclosure system, even if the relevant standards give a certain level of autonomy to companies, companies should be able to provide stakeholders (such as investors) with objective grounds for the selection and exclusion of important topics. As such, it is advisable to prepare a systematic and reliable “materiality assessment” process.

[1] For reference, the ESG disclosure requirement was planned to be gradually expanded to (i) KOSPI-listed companies with assets of KRW 2 trillion or more (starting from 2025), (ii) KOSPI-listed companies with assets of KRW 1 trillion or more (starting from 2027), (iii) KOSPI-listed companies with assets of KRW 500 billion or more (starting from 2029) and (iv) ultimately, all KOSPI-listed companies.
[2] That said, since Article 1 of the draft disclosure standards stipulates the conceptual foundation and general disclosure requirements, companies must comply with both Article 1 and Article 2 of the disclosure standards when disclosing information for climate-related matters.
[3] If a company chooses not to disclose certain information, it is not obligated to disclose its decision and the grounds for such decision.
[4] If a company chooses not to disclose certain information, it must disclose its decision and the grounds for such decision.
[5] The draft disclosure standards (i) suggested that companies may choose not to disclose comparative information for the first fiscal year subject to the sustainability disclosure standards (i.e., transitional provision exempting the disclosure of comparative information), and (ii) indicated that the decision on whether to mandate the disclosure of Scope 3 emissions and the timing thereof if mandated will be made by consulting with the relevant government ministries.

[Korean Version]

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