SEC waters down climate disclosure rules

March 8, 2024|Written by |Securities & Exchange Commission

The US Securities and Exchange Commission (SEC) approved its anticipated climate disclosure rules but watered down emission disclosure requirements under pressure from politicians and lobbying groups, making it less stringent than other jurisdictions such as the EU and California.

The SEC voted 3-2 on Wednesday to require public companies to include information on climate-related risks in their filings but left out requirements for companies to include scope 3 emissions, which measures pollution from supply chains and customers. The rules also softened the requirements for when companies will need to reveal their direct emissions, known as scope 1 and 2.

While some industry groups strongly oppose including scope 3, an analysis of the thousands of comments the SEC received in 2022 found that over 97% of commenters support their inclusion.

The rules also require companies to report any actual and potential material impact on climate-related risks on their business strategy, model, and outlook, as well as activities to mitigate or adapt to such risks. The final rule changed the need for certain information to be material, which essentially changes the information to be what is deemed important by investors.

Publicly traded companies will also need to include information about climate risks that could impact its operations and finances.

The rules will be phased over time, depending on the size of the company and type of disclosure. Larger companies will need to start reporting in 2026, while smaller companies have until 2028. The smallest public companies are completely exempt from scopes 1 and 2 reporting.

Political backlash

The final rules were passed along party lines after two years of debate and are likely to come under legal scrutiny from both Republicans, who accuse the SEC of going beyond its jurisdiction, and environmental groups, who say the rules don’t go far enough. The Sierra Club said it is considering challenging the SEC’s removal of key provisions from the final rule.

Bill Harter, principal ESG solutions advisor at Visual Lease, said he’s less concerned about the legal issues that are likely to come up and more about a potential Congressional review. Under the Congressional Review Act, Congress can overturn final rules issued by federal agencies within 60 session days.

Harter believes the date of the ruling was rushed to be delivered before the upcoming election when a new administration could potentially trigger the 60-day overturn, while scope 3 was removed to try to appease those who might otherwise oppose the rules.

“It’s a very divided country today and what we’re seeing with this rule is just reflective of that,” he said.

SEC chair Gary Gensler has pushed back against claims that the commission should not be involved in climate issues, saying that investors want the information.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information,” he said during the meeting. “It’s in this context that we have a role to play with regard to climate-related disclosures.”

Commissioner Caroline Crenshaw, a Democrat, supported the rule but expressed her disappointment that the final rules did not include scope 3 emissions. She said she hoped stronger disclosure requirements could be introduced in the future.

“Disclosure of greenhouse gas emissions provides information that helps investors understand the current and potential financial risks a company faces. Given our clear authority, rolling back the proposals is a missed opportunity,” she said.

Meanwhile, Republican commissioner Hester Peirce said in her dissent that the final rule differed too much from the proposed rules and was likely to “overwhelm investors, not inform them”.

“The final rule is different from the proposal, but it still promises to spam investors with details about the Commission’s pet topic of the day – climate,” she said.

Impact of leaving out scope 3

Leaving out scope 3 emissions from the SEC ruling is unlikely to change much for larger multinational companies such as banks, as many have made net-zero commitments and have already invested a lot of money and resources in collecting data around their emissions, said Hortense Viard-Guerin, director at consulting firm Baringa Partners.

“Global financial institutions have started to link this collection of data and the reporting of this data to their strategy and to their business strategy,” she said.

Scope 3 emissions are also required in other jurisdictions, such as California, while other US states like New York are also considering similar legislation. According to some estimates, nearly 75% of Fortune 1000 companies could be required to disclose their carbon emissions under California’s climate disclosure rules, although the legislation is already being challenged in court.

“I think California and the rest of the world has, to a large extent, stolen the thunder of the SEC,” said Harter.

The impact of the SEC bill is more that there’s a “resolution in companies’ minds that we now have some certainty and can move ahead,” he said.

Having so many different disclosure rules is likely to cost more money and resources for companies, said Viard-Guerin.

“It’s way easier for a company to be able to have a single report that they produce at a group level as opposed to very different requirements across different legal entity jurisdictions and even states,” she said.

Advocates disappointed

Many advocacy groups were disappointed by the SEC’s decision to leave out scope 3, although they were glad the rules were finally approved. The US still remains behind globally on climate disclosures and needs to do more to become a climate leader, said Kate Levick, associate director at E3G.

“Finalisation of the SEC’s climate disclosure rule is a big achievement, but the US is still behind the curve internationally,” she said.

Ben Jealous, executive director of the Sierra Club, said the ruling is a positive step but falls short of its mission and leaves investors “in the dark about critical information needed to make informed choices about companies’ financial risks, including risks stemming from the failure to invest in the transition to a decarbonised economy”.

The SEC headed special interest groups amid fears of litigation, setting a bad precedent for federal agencies, said David Arkush, director of Public Citizen’s climate programme.

“This decision illustrates the peril of recent supreme court decisions restricting agency authority – that agencies will self-censor and decline to execute their roles fully,” he said.

This page was last updated March 8, 2024

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