Recently, major countries have mandated “climate disclosure,” which requires companies to inform investors and other stakeholders about risks related to climate changes and their responses. These requirements primarily involve disclosing information such as carbon emissions, climate risks, climate strategy and objectives, ESG performance, among others. The specifics and timing of these disclosure requirements vary by country.
Key disclosure regimes – such as the International Sustainability Standards Board (“ISSB”)’s International Financial Reporting Standards 2 (“IFRS S2”), the US Securities and Exchange Commission (the “US SEC”)’s Climate Disclosure Rules, and the European Union (the “EU”)’s Corporate Sustainability Reporting Directive (the “CSRD”) – affect many companies, including those based in Korea. The year 2025 is significant as it marks the full enforcement of these international climate disclosure standards along with the developments of Korea’s climate disclosure regulations. To prepare for the full implementation of climate disclosure, it is necessary to assess its impact on companies and identify ways to effectively respond.
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Global Climate Disclosure Trends
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ISSB’s IFRS S2 Climate-related Disclosure Standards
The ISSB’s IFRS S2 Climate-related Disclosure Standards, announced on June 26, 2023, took effect on January 1, 2024, with a one-year grace period for implementation. The standards require the reporting of Scope 1 and 2 greenhouse gas emissions, as well as climate-related indicators and targets. The ISSB has also recommended that Scope 3 emission be included in the disclosure requirements when countries establish their climate disclosure regulations.
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Scope 1 emissions: “Direct emissions” of greenhouse gases emitted directly during the production stage of products
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Scope 2 emissions: “Indirect emissions from owned assets,” referring to greenhouse gases emitted from the production of energy used by a company
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Scope 3 emissions: “Indirect emissions excluding emissions from owned assets,” referring to greenhouse gases emitted throughout a company’s value chain
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Full-scale Implementation of EU CSRD
The EU CSRD aims to elevate sustainability reporting to the same level as financial reporting, and it has been implemented in phases starting from the 2024 fiscal year with disclosures required in 2025. From the 2025 fiscal year, it will also be expanded to include local subsidiaries of non-EU companies, meaning that Korean companies with local subsidiaries subject to reporting in the EU will directly bear the reporting obligations under the CSRD. Furthermore, starting from the 2028 fiscal year, the reporting obligations will be extended to non-EU controlling companies generating revenues that exceed certain thresholds within the EU.
When the applicable companies fulfill their reporting obligations under the CSRD, they should follow the European Sustainability Reporting Standards (the “ESRS”), wherein the first reporting topic related to “Environment (E)” is specifically ESRS E1, which addresses climate change reporting standards.
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US SEC’s Climate Disclosure Rules
The US SEC Climate Disclosure Rules, finalized on March 6, 2024 (the “SEC Rules”), are set to be implemented in phases starting from the 2025 fiscal year, based on company size. These rules mandate that large public companies disclose climate-related governance, strategies, risk management, and greenhouse gas emissions (Scope 1 and 2 emissions), and they also require third-party assurance. If the SEC Rules are implemented as scheduled, Korean companies that are publicly traded in the US (currently ten companies) will directly bear the reporting obligations under the SEC Rules. While not legally mandated, these companies will have the option to voluntarily disclose Scope 3 emissions, which could indirectly impact Korean companies included in their supply chains.
However, the newly appointed SEC Chairman of the Trump administration has requested that a federal appellate court temporarily suspend all legal proceedings related to the SEC Rules. Additionally, an executive order has been issued to halt the implementation of the SEC Rules. Therefore, the US climate disclosure system may face delays, modifications, or even repeal as it currently undergoes review.
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Climate Disclosure Trends in Korea
The Financial Services Commission of Korea has been establishing domestic “sustainability disclosure standards” that ensure consistency with international disclosure standards through the Korea Sustainability Standards Board (“KSSB”). On April 30, 2024, KSSB announced the draft standards for public opinions until August 31, 2024. According to the public feedback, a significant number of companies appear to agree on the necessity of mandatory climate disclosures, but there are also concerns regarding the inclusion of Scope 3 emissions and the timing of implementation.
Currently, these “sustainability disclosure standards” are set to be implemented “after 2026.” The exact timing and details will be determined by considering the situations in other major countries; however, the implementation timeline could be accelerated if the proposed amendment to the Capital Markets Act, which mandates ESG disclosure, is passed by the National Assembly. On the other hand, it is also possible that there will be increased calls for a cautious approach to implementation in light of recent trends in the US. Accordingly, closely monitoring relevant developments in 2025 is crucial.
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Risks Associated with Climate Disclosure
If a company fails to fulfill its climate disclosure obligations or does so inaccurately, it may face sanctions, including criminal penalties, administrative measures, administrative fines, and penalties imposed by stock exchanges if found in violation of securities laws of various countries.
Additionally, if a company provides false or exaggerated climate-related information or omits significant details in its disclosures, greenwashing issues may arise, potentially leading to lawsuits and complaints from key stakeholders such as shareholders, investors, and NGOs. Furthermore, it is important to note that there is a growing tendency to hold individual directors personally for failing to uphold their duty of good faith in corporate decision-making concerning climate change.
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Strategies to Respond to Climate Disclosure Systems in 2025
Climate disclosure may present new opportunities for well-prepared companies. At a critical juncture where global climate disclosure systems are becoming increasingly prevalent, companies should consider the following strategies:
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Impact analysis of global disclosure standards: It is essential to monitor major international disclosure standards, including IFRS S2, the CSRD, and the US SEC Rules, and to analyze the impact of each standard on companies.
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Establishment of a system for the collection and verification of information subject to disclosure: Implementing a system, including an IT system that determines the scope of information meeting each disclosure standard and establishes how to collect and verify the information is necessary.
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Supply chain risk management: It is crucial to build a system to secure data related to Scope 3 emissions and biodiversity from business partners and analyze indirect regulatory impacts.
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Transparent disclosure and credibility assurance: Applying external green standards that command public confidence when determining eco-friendliness is necessary to reduce the risks of greenwashing. Companies can enhance competiveness by establishing internal control procedures to ensure the accuracy of disclosed data.
In addition to responding directly to the climate disclosure systems applicable to companies, it is also crucial to evaluate whether necessary strategies are properly established and operated from a supply chain perspective, including subsidiaries and major suppliers. This evaluation is essential for effectively responding to the changing business environment and strengthening competitiveness.
[Korean Version]
