Executive Summary

• As sustainability requirements increasingly become fragmented, boards should navigate divergent state, federal and international laws, regulations, policy frameworks and shareholder pressures that heighten operational, legal and political risks.
• Climate Reporting & Disclosure Requirements. U.S. states like California and New York continue to seek to advance expansive climate reporting mandates despite federal pullbacks, while the EU, Middle East and other international jurisdictions tighten sustainability reporting and due diligence requirements.
• ESG in the States. Companies face rising complexity as U.S. states adopt opposing pro- and anti-ESG laws that impact investment decisions, contracting eligibility and operational risk. Boards should monitor this patchwork of state level mandates, assess compliance gaps and prepare for rapid shifts in enforcement priorities driven by political change.
• Greenwashing. Companies face mounting exposure to greenwashing claims, prompting boards to strengthen verification, assurance, carbon accounting and governance processes around sustainability disclosures and marketing statements.
• Shareholder Activism. Activist proposals, proxy battles and derivative suits continue to pressure boards to demonstrate credible sustainability oversight and measurable progress toward stated sustainability commitments.
• Contracts. Contracting practices increasingly embed sustainability requirements, requiring boards to consider supply chain diligence, compliance frameworks and the potential business risks associated with sustainability related contractual terms.

Introduction

Boards must navigate multiple governance or oversight considerations related to sustainability, including state, federal and international reporting or disclosure requirements; various and potentially conflicting state laws; greenwashing claims; shareholder activism and contractual obligations. In the U.S., this falls against the backdrop of a federal government and certain state governments increasingly scrutinizing pro-sustainability initiatives. As a result, boards of directors now more than ever must understand the changing sustainability landscape and the actions to take to minimize operational, financial, legal, regulatory and political risks.

Climate Reporting/Disclosure Requirements

Varying climate-related disclosure obligations impose operational and compliance challenges for companies operating across jurisdictions. These mandates expose businesses to liability risks on both ends of the spectrum: under-reporting can lead to regulatory penalties or investor claims, while over-reporting may trigger litigation if disclosures prove inaccurate or misleading. Compliance often necessitates significant investment in data systems and cross-functional governance. Failure to meet reporting requirements may result in reputational harm, enforcement actions and potential financial liability.

In the sections below, we examine key frameworks in the U.S. (federal and state), the European Union (EU) and other international jurisdictions, each reflecting heightened investor and regulatory expectations for transparency on climate risks and sustainability performance.

U.S. Federal

While the U.S. intermittently has signaled interest in climate reporting and disclosure, those efforts have stalled or been reversed. The Biden administration pursued a “whole-of-government” approach to climate and sustainability, embedding climate considerations across the executive branch and promoting disclosure. The Trump administration has taken the opposite tack, adopting a “whole-of-government” deregulatory approach directing agencies to resist efforts that could advance climate-related policies or impose sustainability obligations.¹ This posture has resulted in the withdrawal or rollback of prior guidance and rules, leaving federal climate reporting largely dormant. The absence of congressional action compounds the uncertainty, exposing companies to regulatory whiplash as priorities shift dramatically between administrations. For now, boards can anticipate an absence of climate-related mandates at the federal level, at least through the midterm elections later this year, while recognizing that a change in administration quickly could reverse course once again.

State-Level Efforts

With federal reporting and disclosure efforts moribund, states like California and New York continue to advance climate disclosure mandates, provided they survive legal challenges.

California: SB 253 and SB 261

In 2023, California passed two climate disclosure laws: SB 253, the Climate Corporate Data Accountability Act and SB 261, the Climate-Related Financial Risk Act. SB 253 requires companies with annual revenues exceeding $1 billion that “do business in California” to publicly disclose their Scope 1-3 greenhouse gas (GHG) emissions. Initial reporting is set to be phased in starting August 10, 2026 (Scope 1 and 2), with Scope 3 disclosures required by 2027. SB 261 requires companies with annual revenues exceeding $500 million that “do business in California” to publish a report to the company’s website biennially, beginning January 1, 2026. According to a California Air Resources Board (CARB) draft checklist, covered entities must select and adhere to a reporting framework and address climate-related financial risks across four core elements: governance, strategy, risk management, and metrics and targets (aligned with the Task Force on Climate-Related Financial Disclosures framework).

In January 2024, groups of business associations led by the U.S. Chamber of Commerce challenged SB 253 and SB 261 in the U.S. District Court for the Central District of California, arguing that the laws violate the First Amendment by compelling speech on politically charged issues like climate change. In August 2025, the district court denied plaintiffs’ motion for preliminary injunction, prompting appeal to the U.S. Court of Appeals for the Ninth Circuit. In November 2025, the Ninth Circuit stayed enforcement of SB 261’s January 1 deadline pending oral argument on the merits of the appeal. In an enforcement advisory, CARB clarified that it would not enforce SB 261’s January 1, 2026 statutory deadline considering the Ninth Circuit ruling, and that it “will provide further information—including an alternate date for reporting, as appropriate—after the appeal is resolved.” Despite this enforcement discretion, consistent with its commitments over the past several months, on December 1, 2025, CARB opened a docket for submissions and to date a number of entities have filed their reports.

New York: Part 253 

In December 2025, the New York Department of Environmental Conservation finalized GHG reporting regulations under the Climate Leadership and Community Protection Act. Beginning June 1, 2027, owners and operators of defined “facilities” in New York emitting over 10,000 metric tons of CO₂e annually, as well as fuel suppliers, certain waste haulers, electric power entities and other specified categories, must submit annual GHG emissions reports. Large Emission Sources and certain waste facilities face earlier compliance milestones (related to monitoring plans) in late 2026.

European Union: CSRD and CSDDD

Across the pond, the EU recently revised its sustainability and reporting regime through the Corporate Sustainability Reporting Directive (CSRD), originally adopted in 2022, and the Corporate Sustainability Due Diligence Directive (CSDDD), originally adopted in 2024.

CSRD requires large EU companies and certain non-EU companies with significant EU operations to disclose detailed information on environmental, social and governance (ESG) matters under the principle of double materiality. This principle requires companies to report how sustainability issues affect financial performance and how their operations impact people and the environment. Reports must be prepared in accordance with the European Sustainability Reporting Standards (ESRS) and are subject to limited assurance requirements. Large, public-interest entities were required to publish reports in 2025, with in-scope large EU companies required to publish in 2028, small- and medium-sized enterprises (SMEs) and non-EU companies with significant EU turnover to follow later, with full scope phased in by 2029.

Following various proposals throughout 2025 to simplify, streamline and reduce the scope and reporting burden of CSRD and CSDDD, the EU is expected to finalize text confirming that companies meeting the following thresholds will be within scope:

CSRD

• EU companies with both (i) an average of over 1,000 employees; and (ii) over €450 million of net turnover, in each case over a two-year period. This applies both on an individual and a consolidated basis.
• Non-EU companies with both (i) over €450 million of net turnover generated in the EU on a consolidated basis, and (ii) an EU subsidiary with over €200 million of net revenue.²

CSDDD

• EU companies with both (i) an average of over 5,000 employees; and (ii) over €1.5 billion of net turnover.
• Non-EU companies with over €1.5 billion of net turnover generated in the EU on a consolidated basis.

In addition, there has been a significant reduction in the CSRD reporting burden, with the ESRS likely being significantly reduced and watered down, as well as a reduction in the compliance requirements under CSDDD, including deletion of the climate transition plan requirement and a removal of the civil liability harmonized regime.

EU member states are required to transpose the CSRD and CSDDD into national law by July 2027 and July 2028 respectively. Continued review will be needed to assess whether any member state will attempt to widen the scope of these directives as part of the transposition process.

International: Middle East and Beyond

Climate reporting is expanding well beyond the EU and U.S. In the Middle East, Oman, Jordan, Qatar and Kuwait are phasing in mandatory sustainability reporting between 2025 and 2027. Since May 2025, private and public companies in the United Arab Emirates (including those in free zones) must monitor Scope 1–3 emissions, implement reduction strategies and maintain records, with penalties for noncompliance exceeding $500,000 and higher fines for repeat violations. In Saudi Arabia, companies increasingly make sustainability disclosures voluntarily, aligning disclosures with the Saudi Exchange’s ESG guidelines. Tadawul, the Saudi Exchange, issued the ESG disclosure guidelines in 2021, after joining the UN Sustainable Stock Exchanges Initiative in 2018. These guidelines are part of the Kingdom’s broader sustainability effort, Vision 2030, which promotes sustainable growth and economic diversification.

The trend continues across the south Pacific and Asia, where Australia, Japan, Indonesia, South Korea and Singapore require mandatory, International Sustainability Standards Board (ISSB)-aligned disclosures, with other countries, like Thailand, exploring adoption of such requirements. 

The trend is clear: despite the rollback of climate disclosure requirements at the federal level and some states in the U.S., climate disclosure requirements increasingly are becoming a requirement for businesses operating in multiple jurisdictions.

Recommendations for Directors

To prepare for this evolving and fragmented disclosure environment, directors should consider the following actions:

• Create or expand oversight or governance structures to assess reporting requirements and applicability, develop a streamlined reporting process and identify qualified third-party assurance providers and verifiers.
• Evaluate the efficacy of oversight and governance structures to ensure disclosures are consistent with applicable law, company operations and practices and long-term strategic priorities.
• Assess financial, legal, reputational and operational risks arising from conflicting state, federal and international sustainability reporting standards across multiple jurisdictions.
• Support investments in data infrastructure to track Scope 1–3 emissions and other climate risk metrics internally and across the company’s value chain.
• Monitor legislative developments in the U.S. and other jurisdictions of interest to ensure disclosures are consistent with applicable law and company operations.

States and Sustainability

State Legislation

In addition to climate reporting and other applicable environmental laws, companies face a rising complexity of sustainability regulations across U.S. jurisdictions that may impact director decisions. For several years, many states have adopted pro-ESG laws to push companies to adopt more ESG-minded practices. For example, states have enacted laws to require divestment of environmentally or socially harmful industries (e.g., thermal coal mining), require consideration of ESG principles in business practices, require disclosure of sustainability or social metrics (e.g., gender composition of boards of directors) or require consideration of ESG factors for public fund investment decisions.

On the other hand, anti-ESG states have adopted laws to counteract consideration of ESG principles. For example, anti-ESG laws may prohibit financial service providers from “discriminating” against certain sectors or industries based on ESG metrics (e.g., fossil fuel, agriculture, firearm industries), prohibit companies that “discriminate” against such sectors from obtaining state contracts or restrict state entities that control fund investments to considering only pecuniary, non-ESG factors when making public fund investment decisions. Companies that fail to conform to anti-ESG laws in the jurisdictions in which they operate may face exposure in terms of state actions, loss of business opportunities or reputational damage.

The Trump administration has targeted pro-ESG initiatives or state laws. For example, in an April 2025 executive order titled “Protecting American Energy from State Overreach,” President Trump directed the attorney general to identify and take action to stop enforcement of state laws that burden domestic energy and to prioritize such laws that address ESG initiatives.

Recommendations for Directors 

To prepare for upcoming fluctuations in this area, directors should ensure that their management teams:

• Account for jurisdictions in which a company operates with varying “pro-” and “anti-” ESG or sustainability laws and undertake a gap analysis to consider compliance risks and opportunities to improve and/or streamline compliance functionality.
• Evaluate financial, legal, reputational and operational risks from varying required and voluntary reporting regimes.
• Monitor developments in applicable reporting frameworks, including developments relevant to enforcement of existing laws.

Greenwashing

Greenwashing refers to exaggerated, misleading or false claims about a company’s environmental performance or sustainability initiatives. For companies, including directors and officers, the stakes are high. Greenwashing can trigger lawsuits or regulatory enforcement. These claims may arise from mandatory disclosures (like CSRD or SB 261, discussed above), voluntary statements or marketing campaigns. They carry reputational, financial and legal risks. Consider the following example as a cautionary tale.

Unsubstantiated Net Zero Claims

In February 2024, the New York attorney general sued a large producer of beef products-in New York state court, alleging that the producer’s net zero claims violate state consumer protection laws. The state reasoned that the company’s claims were unsubstantiated and misleading because the company had “no viable plan” to achieve that goal. According to the complaint, the company’s estimated annual GHG emissions exceed those of the entire country of Ireland given how emissions intensive the beef supply chain is. Yet, the company failed to identify how it would attempt to negate these emissions. In November 2025, the company agreed to a $1.1 million settlement, with proceeds supporting state climate-smart agriculture programs, and to revise its marketing language, framing its net zero claims as a “goal” rather than a “pledge” or “commitment.” This case demonstrates the significance of carefully considering a company’s aspirational statements and marketing claims, and supporting such statements with documented, actionable steps the company has taken toward its stated objectives. Consider the following actions to avoid greenwashing pitfalls.

Recommendations for Directors

• Disclose clear and measurable sustainability-related actions the company has taken or plans to take. Avoid aspirational language not supported by credible strategies.  
  • For example, the EU directive 2024/825, Empowering Consumers for the Green Transition (ECGT), prohibits companies from making generic claims (e.g., “environmentally friendly,” “energy efficient” or “biodegradable”) absent certification (EU Ecolabel or equivalent).
• Ensure that management teams implement environmental or sustainability verification or audit processes, using properly accredited third parties.
  • Obtain third-party assurance for disclosures.
  • Confirm accurate marketing and product labeling (e.g., recyclability and compostability claims).
  • Purchase verified carbon offsets or credits that meet specified internal quality criteria or certified “sustainably sourced” products.
  • Discuss sourcing with upstream and downstream partners.
• Monitor litigation and regulatory trends to stay informed on evolving standards, enforcement priorities and litigation risks.
  • For example, the ECGT requires EU member states to transpose the directive into national law by March 2026, with enforcement beginning in September 2026.
• Balance greenwashing risks with greenhushing risks.³

Shareholder Activism

Shareholder Proposals

Shareholders have long utilized shareholder proposals to force votes on measures that target specific investment results or policy outcomes, including on climate or sustainability issues. The adequacy of a board’s response to shareholder proposals may be challenged through shareholder derivative suits or proxy battles.

Given the regulatory uncertainty around sustainability, the number of shareholder proposals related to sustainability dropped in 2025 compared to previous years, as did support for them. Further, the Trump administration has taken steps to make it more difficult for shareholders to force a vote on shareholder proposals, including those related to sustainability.

For example, in November 2025, the SEC announced it would only review requests to exclude shareholder proposals from proxy materials that are based on grounds that the proposal is improper under state corporate law. This change would remove from SEC shareholder review proposal exclusions that are based on other grounds such as procedural deficiencies, false or misleading statements or ordinary business. However, these changes may prompt shareholders to pursue alternative courses of action such as proxy battles or shareholder derivative suits.

Shareholder Derivative Suits

Shareholders may bring derivative lawsuits arguing that, by failing to adequately consider or adopt climate or sustainability measures, a board failed to act in the best interests of the company. For example, shareholder derivative suits may be brought to hold a board of directors accountable to its sustainability commitments, such as climate targets. In these suits, shareholders may argue that the reputational damage and unnecessary risk exposure caused by the board’s failure to take actions to reach such targets amount to a breach of fiduciary duties.

Indeed, in 2023, an environmental organization sought permission from the U.K. High Court to bring a derivative action alleging that an oil & gas company’s directors breached their fiduciary duties by failing to adopt an adequate energy‑transition strategy away from fossil fuels. The High Court ultimately dismissed the case for failure to establish a prima facie claim. 

Recommendations for Directors

Directors should:

• Prepare for and adequately consider activist shareholder proposals to understand the appetite for sustainability measures.
• Review environmental and energy transition commitments or plans regularly and monitor progress.
• Maintain adequate transparency with shareholders regarding updates or changes to the board’s sustainability position.
• Minimize risk by ensuring compliance with state and federal sustainability laws or voluntary frameworks, where applicable.

Contracts

Contractual Obligations

Consideration of sustainability principles has increasingly influenced contractual decision making. As companies recognize that their sustainability commitments extend into their supply chain, contracts now often require suppliers to align with these commitments or address related sustainability risks. For example, developers increasingly factor sustainability or environmental considerations into construction contracts to assess project viability and manage risk. Similarly, they more often consider an entity’s sustainability commitments or progress when making merger, acquisition or partnership decisions. Failure to comply with sustainability-related contractual obligations can expose the company to litigation for breach of contract claims leading to potential termination, damages, reputational harm or operational disruption.

Recommendations for Directors

Directors should:

• Evaluate whether sustainability considerations affect a decision to pursue a contract.
• Ensure contractual terms are reviewed carefully to determine the presence of sustainability principles, considerations or requirements.
• Establish a framework to monitor compliance with contract terms to avoid breach of contract claims and operational delays.
• Conduct robust supply chain due diligence and implement oversight frameworks where sustainability performance is material.
• Monitor how shifts in regulation may impact the necessity or desirability of sustainability-focused contractual provisions.

Conclusion

Overall, directors should keep the following top of mind:

• Monitor regulatory developments in the U.S. at the state and federal levels, in the EU and other international jurisdictions to determine requirements applicable to a company’s operations and its necessary compliance requirements.
• Evaluate company sustainability claims and commitments and monitor progress. Ensure proper transparency with stakeholders on developments.
• Adequately consider shareholder proposals or other activism related to sustainability measures.
• Ensure proper consideration of and compliance with contractual obligations related to sustainability.

^{1 For example, in November 2025, the U.S. Securities and Exchange Commission (SEC) announced it would only review requests to exclude shareholder proposals from proxy materials that are based on grounds that the proposal is improper under state corporate law.}

^{2 See General Secretariat of the Council, Proposal for a Directive of the European Parliament and of the Council amending Directives 2006.43.EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760.}

^{3 Greenhushing refers to a company’s deliberate choice to under-report or withhold information about its sustainability initiatives.}