More emission reporting now required
WASHINGTON – The U.S. Securities and Exchange Commission on Wednesday approved a rule that will require some public companies to report their greenhouse gas emissions and climate risks, after last-minute revisions that weakened the rule in the face of strong opposition from companies.
The rule was one of the most anticipated in recent years from the nation’s top financial regulator, drawing more than 24,000 comments from companies, auditors, legislators and trade groups over a two-year process. It brings the U.S. closer to the European Union and California, which moved ahead earlier with corporate climate disclosure rules.
The rule passed 3-2, with three Democratic commissioners supporting it and two Republicans opposed.
Publicly traded companies will be required to say more in their financial statements about the risks climate change poses to their operations and their own contributions to the problem. But the version approved was weaker than an earlier draft, with changes that weren’t made public until Wednesday’s meeting.
The narrowed rule doesn’t include requirements that companies report some indirect emissions known as Scope 3. Those don’t come from a company or its operations, but happen along its supply chain – for example, in the production of the fabrics that make a retailer’s clothing – or that result when a consumer uses a product, such as gasoline.
Companies, business groups and others had fiercely opposed requiring Scope 3 emissions, arguing that quantifying such emissions would be difficult, especially in getting information from international suppliers or private companies.
The SEC said it had dropped the requirement after considering those comments. Environmental groups and others in favor of more disclosure had argued that Scope 3 emissions are usually the largest part of any company’s carbon footprint and that many companies are already tracking such information.
Commissioner Caroline Crenshaw, a Democrat, voted for passage but called the rule “a bare minimum” that omits important disclosures. She called Scope 3 emissions a “key metric for investors in understanding climate risk” and said investors are already using such information to make decisions.
“Today’s recommendation adopts an unnecessarily limited version of these disclosures,” she said.
Commissioner Hester Peirce, a Republican who opposed the rule, said it would be burdensome and expensive for companies and would trigger a flood of inconsistent information that would overwhelm, not inform, investors.
“However well-intentioned, these particularized interests don’t justify forcing investors who don’t share them to foot the bill,” Peirce said.
The final rule also reduces reporting requirements for other types of emissions, known as Scope 1 and 2. Scope 1 emissions refer to a company’s direct emissions, and Scope 2 are indirect emissions that come from the production of energy a company acquires for use in its operations.
Companies would only have to report those emissions if they believe they are “material” – in other words, significant – to investors – a decision that ultimately allows companies to decide whether they need to disclose emissions-related information. And small or emerging companies don’t have to report emissions at all.
“Climate risk is financial risk. This is a sensible rule to protect investors,” said Elizabeth Derbes, director of financial regulation and climate risk at the Natural Resources Defense Council. “What’s wrong with this rule is that it needs to do much more,” she added. “Investors have been pressing for mandatory disclosure of greenhouse gas emissions, and the agency needs to give them a fuller picture of companies’ risk exposure.”
The final rule will affect publicly traded companies with business in the U.S. ranging from retail and tech giants to oil and gas majors. The SEC estimates that roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the U.S. will have to report information related to their emissions.
The goal of the rule was to require companies to say much more in their financial statements about the risks that climate change poses to their operations and about their own contributions to the problem. That includes the expected costs of moving away from fossil fuels, as well as risks related to the physical impact of storms, drought and higher temperatures intensified by global warming. The SEC has said many companies already report such information, and the SEC’s rule would standardize such disclosures.
The public comment period for the rule had been extended several times, and SEC Chairman Gary Gensler acknowledged last year that debate over Scope 3 emissions was delaying the final rule, with many observers predicting swift legal challenges.
Some Republicans and some industry groups accused Gensler, a Democrat, of overreach. Their criticism largely centered on whether the SEC went beyond its mandate to protect the financial integrity of security exchanges and investors from fraud.