SEC will require companies to disclose emissions, with one glaring gap

After two years of drafting, public comments, and delays, the U.S. Securities and Exchange Commission, or SEC, finally approved its highly-anticipated climate disclosure rules on Wednesday, laying out new requirements for companies to divulge their climate risks and some of their greenhouse emissions in public filings submitted annually to the agency

The new rules require publicly traded companies to analyze and publish how climate change threatens their business — whether through physical risks like floods and other extreme weather or through “transition risks” like regulation. This is in line with the SEC’s mission to protect investors and maintain “fair, orderly, and efficient markets.”

Environmental advocates have welcomed the rules, but with a major caveat. Between the first draft of the SEC’s climate disclosure rules — published in 2022 — and now, the regulator scrapped requirements for companies to reveal greenhouse emissions that stem from the products they sell. These so-called “Scope 3” emissions are often the most significant source of a company’s climate pollution. According to the nonprofit CDP, which runs the world’s most widely used emissions disclosure platform, they make up an average of 75 percent all companies’ emissions.

For fossil fuel companies — whose products are the primary driver of climate change — those Scope 3 emissions can make up to 95 percent of their carbon footprint.

By excluding Scope 3 emissions from disclosure, “regulators are failing to accurately reflect the best available scientific evidence and heed the risks at hand to the economy,” Laura Peterson, a corporate analyst for the nonprofit Union of Concerned Scientists, said in a statement. Charles Slidders, a senior attorney for the nonprofit Center for International Environmental Law, said that the SEC’s approach was “an abdication of the agency’s authority and responsibility to address significant financial risks.”

The SEC has been talking about climate disclosure for more than a decade. In 2010, the agency’s five-member board of commissioners voted to provide companies with “interpretive guidance” on existing disclosure rules that might be affected by new climate-related legal and business developments. It started looking into more concrete requirements in 2020 and released the first draft of its disclosure rules in March 2022.

Proponents of the new rules point to escalating financial risks from climate change — just last year, the U.S. logged a record-breaking number of climate- and weather-related disasters that cost the county at least $92 billion — and say the SEC must protect investors through more rigorous disclosure requirements, including of Scope 3 emissions. According to the nonprofit Ceres, which advocates for corporate environmental sustainability, 97 percent of investor comments submitted to the SEC favored corporate Scope 3 disclosure as part of the agency’s rules for public companies.

Those opposed to stringent disclosure rules, however, say they represent a regulatory overreach by the SEC, and that issues related to climate policy should be left to Congress or to federal environmental agencies. “If Congress meant for the SEC to broadly regulate registrants’ climate change policy, then it would have clearly authorized the Commission to do so,” as the American Petroleum Institute, a lobbying group, said in its 2022 comments to the SEC.

There is discord even within the SEC. While the panel’s three Democrats voted to approve the new rules, its two Republican members excoriated them, with commissioner Mark Uyeda calling them an effort by climate activists to “hijack and use the securities laws for their climate-related goals.” 

The rules are likely to be challenged in court, where their fate remains uncertain — especially in light of recent Supreme Court decisions limiting the federal government’s power to pass ambitious climate-related regulations, like a proposed policy from the Environmental Protection Agency to curb emissions from power plants.

Still, what the SEC is proposing is much weaker than what has already been put in place by other regulators, including the European Union and California. That means companies doing business in those jurisdictions may defer to their stronger rules, the consulting firm Business for Social Responsibility noted in a statement. By not embracing Scope 3 disclosure, the SEC “has marginalized its own significance.”


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