SEC Approves Rule Requiring Some Public Companies to Report Greenhouse Gas Emissions and Climate Risks
The U.S. Securities and Exchange Commission (SEC) has approved a new rule that will mandate certain public companies to disclose their greenhouse gas emissions and climate risks. This decision comes after the rule underwent last-minute revisions due to strong opposition from companies. The SEC’s rule, which passed with a 3-2 vote, brings the United States closer to the European Union and California, both of which have already implemented corporate climate disclosure regulations.
The rule, which has been highly anticipated in recent years, received over 24,000 comments from various stakeholders during a two-year process. While the SEC’s proposal was expected to face immediate litigation, Chairman Gary Gensler stated that the agency had taken into account concerns regarding its legal authorities. The revised rule, however, was only made public during the meeting on Wednesday.
One significant change in the rule is the exclusion of reporting requirements for Scope 3 emissions, which are indirect emissions that occur along a company’s supply chain or as a result of consumer use. Critics of the rule, including companies and business groups, argued that quantifying Scope 3 emissions would be challenging, especially when it comes to gathering information from international suppliers or private companies. Environmental groups, on the other hand, contended that these emissions constitute a significant portion of a company’s carbon footprint and should be disclosed.
Additionally, the reporting requirements for Scope 1 (direct emissions) and Scope 2 (indirect emissions from energy production) have been reduced. Companies will only need to report these emissions if they deem them “material” or significant. This provision allows companies to decide whether they need to disclose such information. Smaller companies are exempt from reporting emissions altogether.
The U.S. Chamber of Commerce, which strongly opposed the rule and is currently suing over California’s similar regulation, stated that it is still reviewing the final version. The Chamber’s executive vice president of the capital-markets group, Tom Quaadman, expressed concerns about the potential impact on businesses and investors, despite the removal of some of the most burdensome provisions.
Following the SEC’s vote, West Virginia Attorney General Patrick Morrisey announced that ten states would challenge the rule in the U.S. Court of Appeals for the 11th Circuit. Commissioner Hester Peirce, a Republican who opposed the rule, argued that it would be costly for companies and would inundate investors with inconsistent information. Commissioner Caroline Crenshaw, one of the Democrats who supported the rule, considered it a bare minimum that unnecessarily limits disclosures. Massachusetts Democratic U.S. Senator Elizabeth Warren shared similar sentiments, expressing disappointment in the SEC’s decision to weaken the rule due to corporate lobbying.
The approval of this rule comes at a time when climate change is contributing to more frequent and expensive weather events worldwide. In 2023, the United States set a record for the number of weather disasters costing $1 billion or more. The new rule will impact publicly traded companies across various sectors, including retail, technology, and oil and gas. These companies will be required to disclose the expected costs associated with transitioning away from fossil fuels and risks related to climate change’s physical impacts.
The SEC estimates that approximately 2,800 U.S. companies and 540 foreign companies with business operations in the U.S. will have to report climate information. The largest companies will need to start reporting emissions for fiscal year 2026, while smaller companies will have to disclose some information for fiscal year 2027. The SEC has emphasized that many companies already report climate-related information, and investors base their decisions on this data.
Critics of the rule, particularly Republicans and industry groups, accuse SEC Chairman Gensler of overreach. They argue that the SEC has exceeded its mandate to protect financial integrity and investors from fraud. While dropping Scope 3 emissions from the rule may not deter litigation, some legal experts believe that the SEC’s modifications fall within its existing statutory authority. California and the European Union have already implemented comprehensive disclosure rules, with California’s regulation requiring both public and private companies with over $1 billion in revenue to report direct and indirect emissions, including Scope 3.
The approval of the SEC’s rule marks a significant step towards increased climate disclosure in the United States. As companies navigate the new requirements, it is clear that there is no one-size-fits-all approach. The final version of the rule will have a profound impact on businesses, investors, and the fight against climate change.
