The SEC approved a rule mandating certain public companies to disclose their greenhouse gas emissions and climate risks. The directive was revised last minute due to resistance from companies.
This regulation was highly anticipated in recent years by the nation's leading financial regulatory body, receiving over 24,000 comments from various stakeholders during a two-year period. This development aligns the US more closely with the European Union and California, both of which had already implemented corporate climate disclosure regulations, as per AP News.
SEC Approves Climate Disclosure Rule
With a close 3-2 vote, the SEC approved a new climate disclosure rule that mandates publicly traded companies to enhance their financial statements by including information about the risks linked to climate change. The ruling was divided based on political affiliations, as three commissioners from one party backed the rule while two from the other party opposed it.
The version that was approved and made public on Wednesday was a milder form of the previous draft. Reporters were briefed on the changes before commissioners discussed the issue. The finalized rule no longer includes the need for companies to disclose Scope 3 emissions, which are indirect emissions that happen along the supply chain or during consumer product usage.
Stakeholders, including companies and business groups, vehemently opposed the inclusion of Scope 3 emissions when the SEC initially proposed the rule two years ago. They argued that quantifying such emissions would be challenging, especially when dealing with international suppliers or private entities.
In order to solve these issues, the SEC deleted Scope 3 and said it evaluated stakeholder feedback. Environmentalists and transparency supporters stated that Scope 3 emissions constitute a large part of a company's carbon footprint, and many companies measure them.
Democratic Commissioner Caroline Crenshaw, while voting for the rule's passage, criticized it as a "bare minimum" lacking crucial disclosures. She emphasized the importance of Scope 3 emissions as a key metric for investors in understanding climate risk, noting that investors are increasingly using such information for decision-making, according to Time.
SEC Commissioner Criticizes New Rule
On the other side, Republican Commissioner Hester Peirce, who opposed the rule, argued that it would impose excessive burdens and expenses on companies, leading to inconsistent and overwhelming information for investors.
The final regulation further simplifies Scope 1 and 2 emission reporting. Companies are now only required to report emissions if they are "material" to investors, giving them freedom to decide whether to disclose. Small and growing firms are excluded from emissions reporting.
Hana Vizcarra, a senior attorney at Earthjustice, criticized the SEC for endorsing incomplete disclosures by dropping Scope 3 requirements, exposing investors to risks.
The rule's impact extends to a wide array of publicly traded companies in the US, from retail and tech giants to oil and gas majors. Required disclosures will encompass the expected costs of transitioning away from fossil fuels and risks related to climate-related events.
SEC Chair Gary Gensler defended the regulation, saying many firms offer such information and investors use it. However, Republicans and industry groups accused Gensler of overreach, wondering if the SEC exceeded its jurisdiction.
The SEC expects 2,800 US and 540 international corporations with US operations to provide climate data. Large corporations must report emissions for fiscal year 2026, while smaller companies will submit some information for 2027, eliminating emissions.
The controversy surrounding the rule is expected to persist, with legal challenges anticipated. While some argue that the SEC may be acting beyond its statutory authority, others believe that the modifications, including the removal of Scope 3 requirements, fall within the agency's existing powers, The Washington Post reported.
