SEC OKS revised rules on climate disclosure
WASHINGTON — The U.S. Securities and Exchange Commission has approved a scaled back version of a controversial rule requiring companies to report their carbon footprint and climate change risks.
Two years in the making, the revised regulations approved Wednesday exempt smaller publicly traded companies and would only require large companies to report greenhouse gas emissions if they are deemed “material” to their business interests. So-called scope 3 emissions from the products they sell — such as the carbon dioxide produced by a gallon of gasoline — do not have to be reported at all.
SEC Chairman Gary Gensler cited public feedback as driving the decision not to include scope 3 emissions but praised the regulation as a historic move toward the creation of consistent climate disclosures that could be compared among companies.
“Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about cli
mate risk,” he said. “These rules will enhance the disclosures investors are relying on to make their decisions.”
The commission was divided 3-2 on the rule, with Commissioner Hester Peirce questioning the need for climate disclosure rules in the first place, ahead of what is expected to be a lengthy legal challenge by American energy and industrial groups.
“The rule has changed but it still promises to supply investors with the commission’s pet topic of the day, climate,” she said. “These changes do not alter the rules fundamental flaw, that climate disclosure deserve special treatment” from other risks companies face.
The SEC proposed the climate disclosure rules in 2022 as a means to bring consistency to the wildly varied way in which companies report their emissions and climate risks. The rules are especially impactful for oil companies and other fossil fuel producers as they seek to market themselves as sustainable
enterprises under increasingly stringent rules around greenhouse gas emissions in nations around the globe.
Under the initial proposal, all companies would report scope 1 and 2 emissions and some would report scope 3 emissions if they were deemed material. Now only companies that entered the stock market with an initial public offering of more than $75 million have to disclose scope 1 and 2 emissions and no one has to report scope 3 emissions, out of concern there was enough data available for companies to accurately assess those emissions, according to the SEC.
The rules are long way from the what the commission proposed in 2022 but still represent a “fundamental change in the landscape,” said Andrew Logan, senior director of oil and gas program at the nonprofit Ceres, which has long advocated for climate disclosure requirements on corporations.
“It’s definitely been watered down,” he said. “The SEC understands this is a very hostile legal environment and they’re trying to achieve what they can.”
The U.S. Chamber of Commerce and the American Petroleum Institute, along with many other industry lobbying groups, campaigned aggressively against the proposed rule, arguing it stood to drown companies in paperwork, particularly smaller firms.
Anne Bradbury, CEO of the American Exploration and Production Council trade group, said while her group was still reviewing the rulemaking, which numbers more than 1,600 pages, she remained “skeptical as to the benefit of its mandated disclosures.”
“The SEC should stick to its stated mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation,” she said.
The SEC’S climate disclosure requirements don’t go as far as standards proposed in Europe and California, where companies will be required to report all emissions, including scope 3. But Republican state attorneys general, along with industry groups, are expected to challenge whether the SEC has legal authority to regulate how companies disclose their greenhouse gas emissions.
Gensler defended the climate rule Thursday as another in a long list of SEC policies aimed at increasing transparency for investors. But the commission’s decision to mandate disclosure outside companies’ financial performance leaves them potentially vulnerable in the courts, said Brendan Quigley, a New York securities attorney and former federal prosecutor.
“Its an area where the SEC has not really gone before,” he said. “There’s historically been a division between regulating a company’s business decisions, which are a matter of state law, as opposed to securities laws, where companies have a lot of discretion as long as it’s accurate.”
Environmental pushback
A week after the Environmental Protection Agency announced it was delaying tough new emissions standards on the nation’s natural gas-fired power plants, the SEC decision Thursday served to inflame climate activists who maintain the federal government is not taking climate change seriously enough.
On Tuesday a coalition of more than 70 environmental
groups, including Greenpeace USA and 350.org, sent a letter to the SEC urging it to include scope 3 emissions in the rule, calling the rule a “step backward in effort to mitigate climate-related financial risks for the protection of investors.”
Under the new disclosure rules, large companies would begin including climate risk statements in their annual financial disclosures beginning in 2025 or 2026, and greenhouse gas estimates beginning in 2026 or 2028, depending on their size. Of the approximately 7,800 companies registered with the SEC, fewer than 3,000 would potentially be required to make those disclosures, and only if company attorneys deem them to be material to their investors’ decision making.
Instances where that information could be deemed material, according to the SEC, would be if a company has a climate target, as many large corporations now do, or if they deem their emissions to be a potential risk to future earnings as governments worldwide move to reduce the volumes of carbon dioxide and methane in the atmosphere.