The Securities and Exchange Commission will force companies to disclose their greenhouse gas emissions for the first time, but watered down a key requirement after heavy lobbying from industry groups.
The SEC voted Wednesday
The vote to finalize the regulations caps months of intense debate inside the agency and in the halls of Congress over what's been billed as one of Washington's signature efforts to address climate change during the Biden era. By pursuing the rule, SEC Chair Gary Gensler has been accused by opponents of seeking to expand the commission's jurisdiction beyond securities into climate issues.
Gensler has vigorously pushed back on that claim, arguing that many investors want the information to guide their decisions. Currently, publicly traded companies use an unstandardized mix of voluntary metrics.
"Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information," Gensler said in remarks for the meeting. "It's in this context that we have a role to play with regard to climate-related disclosures."
Complicating the situation are differing requirements across the globe and in at least one US state.
The SEC's regulations seek to address that by for the first time providing federal baseline requirements for companies to discuss business risks and opportunities associated with a changing climate. The regulations also may make it easier for investors to compare the environmental impact of firms in the same industry.
'Primary audience'
However, the SEC requirements will be markedly less stringent than regulations passed last year by lawmakers in California and European Union requirements. For example, California's emissions disclosure law requires large public and private companies doing business in the state that generate more than $1 billion of annual revenue to publicly disclose Scope 1 and 2 emissions every year starting in 2026 and Scope 3 emissions in 2027. The state's regulations are already being challenged in court.
Ben Jealous, executive director of the Sierra Club, an environmental advocacy group, said the SEC's rule was a positive step, but the omission of Scope 3 disclosures means it "falls significantly short of what's needed."
"Allowing companies to continue hiding a full accounting of their climate pollution keeps investors, including the Sierra Club and our members, in the dark about critical information needed to make informed choices about companies' financial risks," Jealous said.
Under the SEC's final rules, publicly traded companies would have to tell investors about the actual or potential material impact of climate-related risks to their business strategy, model and outlook. The addition that certain information needs to be "material" for companies to have to include it is also a significant change from the proposal. In practice, that limits those disclosures to what is deemed important for decision-making by a reasonable investor.
Companies also would have to disclose climate risks that could harm their operations or financial conditions, such as those caused by rising sea levels, hurricanes, droughts or wildfires. Companies that take steps to minimize or eliminate such risks would have to report those as well.
Compliance costs will vary depending on companies' determination of what type of greenhouse gas emissions reporting is important for their investors, Gensler said during a Bloomberg TV interview. "If an issuer actually determines that it's not material to their investors, the costs would be probably quite low," he said. Compliance costs are estimated to be in the high-six figures for some issuers, Gensler added.
The agency's three Democrats voted in favor of the rule, while the two Republican commissioners opposed it.
Commissioner Caroline Crenshaw, a Democrat who's pushed for a more robust version of the climate rule that included Scope 3 disclosures, expressed disappointment with the final rule, despite supporting it. "Given our clear authority, rolling back the proposal is a missed opportunity," she said. Crenshaw said more rigorous disclosure requirements could be introduced in the future.
Republican Commissioner Hester Peirce said all the additional information would "overwhelm investors, not inform them." Peirce said companies are already required to disclose material risks to investors as part of her dissenting statement.
The pushback from business groups against the plan the SEC floated in March 2022 centered on Scope 3 emissions. Environmental advocates say that pollution constitutes the bulk of a company's carbon footprint, but many in industry say they are difficult to calculate and may give a false impression of a company's environmental impact.
The proposal morphed into a political lightning rod on Capitol Hill once groups like the American Farm Bureau Federation complained that small food producers would be forced by their clients to measure and report their own emissions under the plan.
Legal challenges
It's unclear whether the decision to scuttle Scope 3 in the final rule and other changes will be enough to stave off legal challenges from industry groups. Attorneys general in multiple states, led by West Virginia, vowed to sue the SEC over the rule. On the flip side, the adjustments may lead to litigation from environmental activists, who wanted the SEC to take a more stringent approach.
Despite the changes, the commission's vote was contentious and split along party lines. The rule will go into effect two months after it's officially published in the Federal Register.
Compliance would be phased in over time, depending on the size of a company and the type of disclosure. Large companies would have to start reporting their greenhouse gas emissions in 2026, and smaller ones would have to start reporting in 2028. The smallest publicly traded companies would be exempt from Scopes 1 and 2 reporting.
The SEC also greenlit a new rule on Wednesday to require stock brokerages that work with ordinary investors to disclose more price and trade-execution information as part of a broader overhaul being advanced by the regulator.
