SEC considers changes to climate rule

A pair of recent news reports indicate that the US Securities and Exchange Commission (SEC) is considering changes to its proposed climate disclosure rule. 

Two of the changes under consideration relate to certain disclosure thresholds for reporting and the content of scope 3 emissions disclosures. Some argue that these changes could result in companies making fewer climate-related disclosures than under the existing proposal.

The SEC released its proposed rule for public comment last March. If finalised as proposed, the rule would require corporate issuers of publicly-traded securities, such as stocks and bonds, to disclose the risks and opportunities they face from climate change; how climate change and climate-exacerbated weather events have affected their operation; and their greenhouse gas emissions under scopes 1, 2 and 3.

One article by the Wall Street Journal indicates that the SEC is considering “raising the threshold at which companies must report climate costs”. The proposed rule would require issuers to disclose the financial impacts of severe weather events and other natural conditions on a variety of currently reported line items only when those costs meet or exceed 1% of the total line item. The SEC could potentially raise that threshold or require disclosure only when the climate-related portion is material.

A similar article by Politico notes that the SEC is considering ways to make scope 3 disclosure requirements “more workable”. The proposed rule would require issuers to disclose their scope 3 emissions, which are emissions from up and down a company’s supply chain. To make reporting easier, the SEC could potentially require scope 3 disclosures only from certain industry categories, such as from construction or petroleum products.

The impetus for changes to the proposal likely stem from the threat of litigation by business groups. One staff person for the National Association of Manufacturers told reporters that “all options are on the table”, including litigation. Other industry groups have similarly indicated that they might bring lawsuits to challenge the rule.

Litigation would likely challenge the finalised rule from two angles. First, litigants could argue that the SEC did not adequately consider the economic impacts of its rule and did not require the most effective means of achieving its aims. Second, litigants could challenge the SEC on the grounds that it does not have the legal authority to write particular climate-related disclosure regulations. Before it finalises the rule, the SEC can make changes to address the first type of challenge, but cannot address the second.

In response to news of these changes, one climate advocate told Wall Street Journal reporters that raising the 1% threshold to make the rule more legally sustainable is “not the hill I would die on”. An aide to a Democratic senator told Politico that “the SEC should not back down in the face of baseless attacks by corporate lobbyists and preemptively water down the rule”.

The SEC indicated in a recent public filing that it expects to finalise the regulation in the second quarter of the year.