After two years of drafting, public comment and delays, the US Securities and Exchange Commission, or SEC, has finally given its highly anticipated approval. climate disclosure rules On Wednesday, new requirements were laid out for companies to disclose 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 “transitional risks” like regulation. This is in line with the SEC’s mission to protect and preserve investors”fair, orderly and efficient markets.”
Environmental advocates 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 has scrapped requirements for companies to disclose greenhouse emissions resulting from the products they sell. These so-called “Scope 3” emissions are often the most important source of a company’s climate pollution. According to the non-profit organization CDP, which runs the world’s most widely used emissions disclosure platform, they make a average 75 percent all companies’ emissions.
For fossil fuel companies – whose products are the primary driver of climate change – those Scope 3 emissions can 95 percent of their carbon footprint.
By excluding Scope 3 exemptions from disclosure, “regulators fail to accurately reflect the best available scientific evidence and note the risks facing the economy,” said Laura Peterson, a corporate analyst for the nonprofit Union of Concerned Scientists, in a statement. Charles Slidders, a senior attorney for the non-profit 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” about existing disclosure rules that may be affected by new climate-related legal and business developments. It started looking at more concrete requirements in 2020 and released the first draft of its disclosure rules in March 2022.
Proponents of the new rules point to increasing financial risks from climate change — just last year, the US recorded a record-breaking number of climate and weather-related disasters that cost the country the least. $92 billion — and says the SEC must protect investors through stricter disclosure requirements, including from Scope 3 exemptions. According to the nonprofit organization 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 strict disclosure rules, however, say they represent a regulatory breach by the SEC, and that issues related to climate policy should be left to Congress or to federal environmental agencies. “If Congress had intended the SEC to broadly regulate registrants’ policies on climate change, then it would have clearly authorized the Commission to do so,” as the American Petroleum Institute, a lobby group, said in its 2022. comments to the SEC.
There is disagreement even within the SEC. While the panel’s three Democrats voted to approve the new rules, its two Republican members blasted them, with Commissioner Mark Uyeda calling them an attempt by climate activists to “hack 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 that limit the federal government’s power to enact ambitious climate-related regulations, such as a proposed policy of the Environmental Protection Agency to limit emissions from power plants.
Still, what the SEC is proposing is far 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 can comply with their stricter rules, consulting firm Business for Social Responsibility noted in a statement. By not adopting Scope 3 disclosure, the SEC “marginalized its own meaning.”
