The end of 2023 is fast approaching, and the US Securities and Exchange Commission (SEC) has missed yet another deadline to pass its long-awaited climate risk disclosure rule. The rule, proposed in early 2022, would require publicly traded US companies to disclose their climate risks in regular financial filings. This includes transition risk indicators like greenhouse gas emissions inventories, as well as physical risks like hurricanes and wildfires that can threaten company operations, infrastructure, and assets.
These disclosures are increasingly important to the functioning of capital markets. As climate risks begin to drive losses across the global economy, surveys of investors consistently confirm the importance of climate risk disclosures in capital allocation and risk management. Regulators like the SEC have responded to the growing need for climate risk information with a wave of climate risk disclosure initiatives and mandates.
Yet the SEC’s rule has been stalled for over a year as the agency mulls how to balance the clear call from investors for better information with pushback on the costs of new disclosures from powerful business groups and their Congressional allies. As a result, the US now risks falling behind global peers and competitors who are moving forward and implementing their own climate risk disclosure rules.
The recent passage of a new set of state disclosure laws in California has changed the game for the SEC. These rules, SB 253 and SB 261, broadly mirror disclosures that would be included in the SEC rule. SB 253 requires disclosure of greenhouse gas inventories for companies doing business in California with annual revenue over US$1bn, while SB 263 requires climate risk disclosures for companies with revenues over US$500mn, excluding insurance firms. Together, the bills represent a watershed moment for the US climate risk disclosure debate.
The California laws are such a big deal because lots of US companies do business in the state. Many of the most prominent US companies call the state home, from Apple to Wells Fargo, to Chevron. Recent research from Public Citizen, Americans for Financial Reform Education Fund, and the Sierra Club estimates that 75% of the Fortune 1000 could now be required to disclose their carbon emissions — including Scope 3 emissions — under SB 253, while 73% could be required to disclose under both laws. Covered firms span multiple industries, from tech, to energy, and healthcare. And while these numbers indicate that a majority of the largest US public companies could now be covered by the new California laws, they are also conservative. This is because the definition of what qualifies as “doing business” in California is yet to be decided. These estimates utilize a narrower definition of doing business than the state seems likely to reference. If that is the case, an even higher proportion of US public companies could be required to report their climate risks and emissions by California.
Overall, the California laws mean that a substantial amount of American firms are now likely subject to a strong climate disclosure rule. Practically speaking, the compliance costs of the SEC rule have now plummeted, since any costs for companies to produce emissions inventories or physical risk assessments will already be incurred under California’s laws for covered firms. For firms that need to disclose their risks in annual reports and elsewhere under the SEC rule, compliance will now mean looking up and reporting back information that has already been collected. And while the SEC has faced substantial pushback regarding the inclusion of Scope 3 emissions disclosure, which opponents argue is costly to collect, SB 253’s Scope 3 mandate means that as the rule is implemented, data quality will likely go up, while data costs go down. In other words, the California laws have now cleared the path for the SEC to pass its own rule with reduced costs for both the agency and US companies.
As this reality has set in the wake of SB 253 and 261, opponents of a federal rule might question the need for an SEC rule altogether, under the premise that the California laws now make anything the SEC might implement redundant. If most US companies are already disclosing their climate risks and emissions inventories, they argue, what’s the point of an additional federal rule?
California’s laws only increase the need for the SEC to pass a strong, comprehensive rule that is aligned and applies to all public US companies. After all, there are still firms that will not be impacted by California’s laws, and they still have investors who need access to reliable information. The California laws are also just one in a host of disclosure requirements that US firms must now navigate, making a consistently applied US rule even more important.
Earlier this year, the European Union kicked off its Corporate Sustainability Reporting Directive (CSRD), which requires climate and sustainability disclosures from EU-listed and non-EU companies doing substantial business in Europe. The International Sustainability Standards Board (ISSB) also introduced climate and sustainability disclosure standards that will serve as the global baseline for investors worldwide.
Both the EU law and the ISSB standards differ from California along key dimensions. For instance, the CSRD and ISSB take a materiality approach to emissions disclosure — requiring firms to apply different materiality definitions when assessing what to disclose, with the former invoking double materiality (including impacts on the firm and on external stakeholders) and the latter single financial materiality (impacts on the firm). The SEC rule also requires Scope 3 emissions disclosure only if the reporting firm deems them financially material to their bottom line, in line with the ISSB approach. In contrast, SB 253 requires disclosure of all emissions categories from reporting firms, regardless of a materiality assessment.
While anything the SEC passes will need to be attuned to these differences, the lack of clear, consistent disclosures is the exact reason why climate risk disclosure regulation was initially sought by investors. With new global standards coming online and California’s laws in place, it is even more important for the SEC to pass its own rule, to help streamline reporting obligations for all publicly traded US firms and provide needed clarity and consistency to investors in US public markets.
This page was last updated November 29, 2023
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