SEC climate disclosure rule met with cautious welcome

March 22, 2022|Written by David Clarke|Securities & Exchange Commission

The US Securities and Exchange Commission (SEC) has released its much-anticipated draft rule on climate-related disclosures. The proposal has been met with a cautious welcome from environmental groups.

The rule would require companies to report each year on how they are assessing, measuring, and managing climate-related financial risks. Companies would also need to disclose their greenhouse gas emissions, and explain how they are meeting any climate-related commitments they have made.

“Under today’s proposed rule, the SEC moves toward bringing the US in line with other countries already demanding disclosures, creating more transparency and levelling the playing field for companies who are serious about addressing climate-related risk,” said Tracey Lewis, policy counsel at Public Citizen.

The proposed rule is broadly consistent with recommendations from the Task Force on Climate-related Financial Disclosures, and shares many of the same features as regulations due to come into effect shortly in the UK, EU and Japan. It follows a commitment made last year  by G7 countries to implement mandatory climate reporting.

However, there is some controversy about the SEC’s decision not to require universal disclosure of scope 3 emissions – those generated by a company’s suppliers or partners. The SEC said scope 3 disclosures would only be required if they are material to the company, or if the company had set an emissions target including them. This requirement would also be subject to a carve-out for smaller firms, and a phase-in period lasting until 2026.

The question of what scope 3 emissions are ‘material’ will be left up to individual companies to decide, and could be subject to differing interpretations.

Alex Martin, a senior policy analyst at Americans for Financial Reform Education Fund, said the proposal should be expanded to require all large public companies to report on scope 3 emissions, and introduced much sooner. He also said it should be strengthened to include companies’ climate-related impacts on communities, such as how a company plans to ensure a just transition for workers affected by its decarbonisation plans.

While some climate groups are advocating for tougher requirements, the SEC’s proposal has also met some resistance from some conservatives, including within the SEC itself. Hester Peirce, a commissioner appointed by Donald Trump, issued a statement opposing the rule on the grounds that introducing such requirements would be an overextension of the SEC’s authority.

Peirce’s position appears to be at odds with much of the investor community. In a statement last year, 733 investors accounting for $52 trillion in assets called for governments to implement mandatory climate disclosure requirements.

Moreover, in public comments to the SEC, 65% of investors called for emissions reporting of scopes 1, 2 and 3, according to the Ceres think tank. A poll commissioned by Ceres and Public Citizen also found that 87% of Americans are in favour of companies reporting their climate-related risks.

There had been some concern that the SEC’s proposal would be met with a series of legal challenges. In a response to a call for input on the rule, 16 attorney generals said they opposed a “forced imposition” of the SEC’s environmental, social and governance policies. Ty Gellasch, a fellow at Duke University law school, told Politico that the agency’s decision to go with a more moderate version of the proposal may reduce the risk of litigation.

This page was last updated March 22, 2022

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