Far fewer companies will be required to begin disclosing climate-related information under a rule the US Securities and Exchange (SEC) finalized today, in a retreat from more ambitious climate reporting requirements proposed in 2022.
Publicly traded companies will still have to disclose to investors if they have "material" climate-related risks, under the final rule adopted today, in addition to whether they have processes to manage those risks. But in a major change from the proposal, the SEC will only require companies to disclose their greenhouse gas emissions data if they would be material to investors, with no reporting at all of "scope 3" emissions that arise from a company's supply chain.
The rollback of the rule marks a victory for oil companies, manufacturers and business groups that said the proposed rule — which the agency initially estimated could cost more than $6bn/yr — was too burdensome and was unlikely to offer useful information to investors. Critics were particularly opposed to SEC's initial push for some disclosure of scope 3 emissions, which they said would create a dragnet forcing companies to collect emissions data across their supply chains, even from private and small companies that might consider that data confidential.
The final rule also aligns closer with the status quo. Many large companies, including major oil companies, already voluntarily disclose their direct "scope 1" and "scope 2" greenhouse gas emissions to their investors through annual reports, in addition to other information related to any material climate-related risks they face.
But SEC chairman Gary Gensler said the rule, approved in a 3-2 vote, will offer investors more "consistent, comparable and decision-useful information" on a company's greenhouse gas emissions and climate-related risks. Investors will end up having far more useful information as a result of the rule, he said, replacing an existing voluntary structure under which companies decided on their own what climate information to tell investors.
Despite the rule's rollbacks, state-level Republicans are preparing to challenge the rule in court, based partly on complaints that the SEC has veered away from its investor protection mandate and instead is trying to set climate policy. West Virginia attorney general Patrick Morrisey, who plans to file a lawsuit on behalf of at least nine states later today in the US 11th Circuit Court of Appeals, said one problem with the rule is it would be "virtually impossible" for companies to decide if their emissions are material to investors.
Environmentalists also said they are considering filing a lawsuit challenging the removal of the stringent sectons of the rule, while also defending the SEC's authority to require climate disclosures for publicly traded companies.
The SEC's two Republican commissioners voted in opposition. The rule marks the culmination of activist attempts to "hijack" securities laws to further climate-related goals, commissioner Mark Uyeda said. The disclosure mandate will result in a "flood of climate-related" data that will "overwhelm" investors but not necessarily offer useful information, SEC commissioner Hester Peirce said.
'Bare minimum'
Environmentalists say the disclosure requirement could be useful but would be far more effective if it was finalized as proposed, concerns echoed by Gensler's fellow Democratic commissioners. The final rule is the "bare minimum" for climate-related disclosure and was "better for investors than no rule at all," SEC commissioner Caroline Crenshaw said in explaining her decision to support the new climate rule.
Under the rule, companies with at least $700mn in outstanding shares will have to disclose material climate-related risks in fiscal year 2025. Those companies will also have to begin disclosing material "scope 1" and "scope 2" greenhouse gas emissions — which come from direct operations and buying electricity — in fiscal year 2026, but with reporting deferred until their second quarterly report to offer time to gather data.
The climate risk disclosures will take effect a year later for companies with at least $75mn of outstanding shares, and those companies do not have to begin disclosing material greenhouse gas data until fiscal year 2028. Any smaller publicly held companies will have to report climate-related risks in fiscal year 2027, with no disclosures required at all of greenhouse gas data. The SEC had initially proposed requiring greenhouse gas reporting for all public companies, with no materiality requirement.
The SEC retained requirements for companies to report more information if they have plans to reach climate-related targets and goals. If a company is using carbon offsets or renewable energy credits as a "material component" of its climate goals, it will have to start disclosing any relevant costs and losses.
In another part of the rule, the SEC will require companies to disclose in financial statements any costs, charges and losses in excess of a 1pc threshold that arise as a result of severe weather, droughts, wildfires, sea-level rise or other natural conditions.
The rule's importance has somewhat diminished in the years since the SEC first proposed the mandate. California last year enacted a law to require public and private companies with business in the state and at least $1bn/yr in revenue to disclose their greenhouse gas emissions, including scope 3 emissions, starting as soon as 2026. The SEC rule will not preempt state disclosures, agency staff said.
The SEC initially aimed to finalize the rule by the end of 2022. But the agency repeatedly delayed that timeline amid a shifting legal environment, including the US Supreme Court's 2022 ruling in a separate climate lawsuit that embraced the "major questions doctrine" that raised doubts over novel regulatory initiatives.
