SEC waters down climate disclosure rules

Climate Economy

SEC waters down climate disclosure rules

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Scope 3 disclosure dropped

The U.S. Securities and Exchange Commission (SEC) 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 will require public companies to include information on climate-related risks in their filings. However, it omitted 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 must reveal their direct emissions, known as Scope 1 and 2.

The rules will also require companies to report any actual and potential material impact of climate-related risks on their business strategy, model, outlook, and activities to mitigate or adapt to such risks. The final rule changed the need for specific information to be material, which essentially changes the information to what investors deem essential. Publicly traded companies must also include information about climate risks that could impact their operations and finances.

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

Political backlash

The final rules were passed along party lines after two years of debate. They are likely to come under legal scrutiny from 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.

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.

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 ruling’s date 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 reflects that,” he said.

SEC chair Gary Gensler has resisted 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. 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. She said she hoped stronger disclosure requirements could be introduced in the future. “Disclosure of greenhouse gas emissions helps investors understand a company’s current and potential financial risks. 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 differs 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

Eliminating 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 U.S. states, like New York, consider similar legislation.

Finalisation of the SEC’s climate disclosure rule is a big achievement, but the U.S. is still behind the curve internationally

According to some estimates, nearly 75% of Fortune 1000 companies could be required to disclose their carbon emissions under California’s climate disclosure rules. However, 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. He said 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.”

Viard-Guerin said that so many different disclosure rules are likely to cost more money and resources for companies. “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.

SEC capitulation

Many advocacy groups were disappointed by the SEC’s decision to leave out Scope 3. The US 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 U.S. is still behind the curve internationally,” she said. Ben Jealous, executive director of the Sierra Club, said the ruling 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 decarbonized economy.”

Some worry the SEC capitulated to special interest groups amid fears of litigation, setting a bad precedent for federal agencies, said David Arkush, director of Public Citizen’s climate program. “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.

Written by

Moriah Costa

Moriah Costa is an award-winning freelance journalist and editor who covers personal finance, investing, culture, and environmental issues. Her work has been published in Thomson Reuters, Money, The Guardian, and others. She previously worked as a banking reporter at S&P Global. Originally from Arizona, she's lived in London, Madrid, and D.C. She currently calls Paris home.