(Bloomberg) — The U.S. 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.
U.S. Securities and Exchange Commission votes Wednesday use Climate disclosure requirements will be much looser than those proposed in March 2022, after the agency received thousands of comment letters and numerous lawsuit threats against the plan. The biggest change is that regulators will not force companies to quantify pollution from their supply chains or customers, known as “Scope 3” emissions. In addition, companies will face higher hurdles when they need to disclose more of their direct carbon footprint (i.e. Scope 1 and 2 emissions) in regulatory filings.
The vote to finalize the regulations capped months of heated debate within the agency and in the halls of Congress that was billed as one of the signature efforts in Biden-era Washington to combat climate change. By introducing the rule, SEC Chairman Gary Gensler was accused by opponents of trying to expand the commission’s jurisdiction beyond securities to include climate issues.
Gensler strongly disputes this notion, arguing that many investors want this information to guide their decisions. Currently, listed companies use a non-standardized combination of voluntary indicators.
“Investors, from individual investors to large asset managers, are saying they are making decisions based on this information,” Gensler said in a speech at the conference. “It is against this backdrop that we are moving ahead with climate-related disclosures. It can work.”
The situation is further complicated by varying requirements around the world and in at least one U.S. state.
The SEC’s regulations seek to address this problem by providing for the first time a federal baseline requirement for companies to discuss business risks and opportunities related to climate change. The regulations may also make it easier for investors to compare the environmental impact of companies in the same industry.
“Main Audience”
Cynthia HanawaltThere are significant financial risks and opportunities in climate impacts and the clean energy transition, said the director of the Financial Regulation Practice at Columbia University’s Sabin Center for Climate Change Law. “Investors are the main audience,” she said.
However, the SEC’s requirements will be significantly less stringent than regulations passed by California lawmakers last year and those from the European Union. For example, California’s emissions disclosure law requires large public and private companies doing business in the state with more than $1 billion in annual revenue to publicly disclose Scope 1 and 2 emissions annually beginning in 2026, and Scope 3 emissions beginning in 2027. quantity. has been challenged in court.
read more: California leads SEC in mandating corporate carbon emissions disclosures
Ben Jealous, executive director of the environmental advocacy group Sierra Club, said the SEC’s rule is a positive step, but the omission of Scope 3 disclosures means it “falls far short of what is required.” level”.
“Allowing companies to continue withholding a complete accounting of their climate pollution leaves investors, including the Sierra Club and our members, in the dark about critical information they need to make informed choices about a company’s financial risks,” Jealous said.
Under the U.S. Securities and Exchange Commission’s final rule, public companies must inform investors about the actual or potential material impact of climate-related risks on their business strategies, models and prospects. Additionally, certain information must be “substantial” for companies to include it, a significant change in the proposal. In practice, this limits these revelations to decisions that would be considered important to rational investors.
Companies must also disclose climate risks that could harm their operations or financial condition, such as those posed by rising sea levels, hurricanes, droughts or wildfires. Companies that take steps to minimize or eliminate such risks must also report these risks.
The agency’s three Democratic commissioners voted in favor of the rule, while two Republicans opposed it.
Democratic Commissioner Caroline Crenshaw, who pushed for a stronger version of the climate rule that would include Scope 3 disclosures, expressed disappointment with the final rule even though she supported it. “Given our clear mandate, withdrawing this proposal is a missed opportunity,” she said. Crenshaw said stricter disclosure requirements may be introduced in the future.
Republican Commissioner Hester Pierce said all the additional information would “overwhelm investors rather than inform them.” Pearce said companies were already required to disclose material risks to investors as part of her statement of objections.
Resistance from business groups to the SEC’s plan proposed in March 2022 has mainly focused on Scope 3 emissions. Environmental advocates say pollution makes up the bulk of a company’s carbon footprint, but many in the industry say the figures are difficult to calculate and can give a wrong impression of a company’s environmental impact.
The proposal became a political lightning rod on Capitol Hill once groups like the American Farm Bureau Federation complained that small food producers would be forced to measure and report their own emissions under the program.
legal challenge
It’s unclear whether the decision to repeal Scope 3 and other changes in the final rule will be enough to stave off legal challenges from industry groups and attorneys general in conservative-leaning states like West Virginia. On the other hand, the changes could lead to lawsuits from environmentalists who want the SEC to take stricter measures.
Read more: SEC climate rules face growing legal risks from green groups
Despite the changes, the committee’s vote remains contentious and divided along party lines. The rule will take effect two months after it is officially published in the Federal Register.
Compliance will be phased in over time, depending on the size of the company and the type of disclosure. Large companies must start reporting their greenhouse gas emissions in 2026, and smaller companies in 2028. The smallest public companies will be exempt from Scope 1 and Scope 2 reporting.
The Securities and Exchange Commission also plans to approve a new rule on Wednesday that would require stock brokerage firms that work with ordinary investors to disclose more price and trade execution information as part of a broader overhaul by regulators.
