The 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.

After receiving thousands of comment letters and numerous litigation threats, the SEC is set to impose climate-disclosure requirements that will be significantly softer than those it proposed in March 2022. In the biggest change, the regulator won’t force companies to quantify pollution from their supply chains or customers, known as Scope 3 emissions. Additionally, firms will face a higher bar when they need to reveal more direct carbon footprints in their regulatory filings, which are known as Scope 1 and Scope 2 emissions.

The vote to finalize the regulations caps months of intense debate inside the agency and in the halls of Congress over what’s been billed as one of Washington’s signature efforts to address climate change during the Biden era. By pursuing the rule, SEC Chair Gary Gensler has been accused by opponents of seeking to expand the commission’s jurisdiction beyond securities into climate issues.

Gensler has vigorously pushed back on that claim, arguing that many investors want the information to guide their decisions. Currently, publicly traded companies use an unstandardized mix of voluntary metrics.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information,” Gensler said in remarks for the meeting. “It’s in this context that we have a role to play with regard to climate-related disclosures.”

Complicating the situation are differing requirements across the globe and in at least one U.S. state.

The SEC’s regulations seek to address that by for the first time providing federal baseline requirements for companies to discuss business risks and opportunities associated with a changing climate. The regulations also may make it easier for investors to compare the environmental impact of firms in the same industry.

‘PRIMARY AUDIENCE’

Cynthia Hanawalt, director of Columbia University’s Sabin Center for Climate Change Law’s financial regulation practice, said that there are big financial risks and opportunities linked to climate impacts and the clean energy transition. “Investors are the primary audience,” she added.

However, the SEC requirements will be markedly less stringent than regulations passed last year by lawmakers in California and the European Union. For example, California’s emissions disclosure law requires large public and private companies doing business in the state that generate more than $1 billion of annual revenue to publicly disclose Scope 1 and 2 emissions every year starting in 2026 and Scope 3 emissions in 2027. The state’s regulations are already being challenged in court.

Under the SEC’s final rules, publicly traded companies would have to tell investors about the actual or potential material impact of climate-related risks on their business strategy, model and outlook. The addition that certain information needs to be “material” for companies to have to include it is also a significant change from the proposal. In practice that limits those disclosures to what is deemed important for decision-making by a reasonable investor.

Companies also would have to disclose climate risks that could harm their operations or financial conditions, such as those caused by rising sea levels, hurricanes, droughts, or wildfires. Companies that take steps to minimize or eliminate such risks would have to report those as well.

The pushback from business groups against the plan the SEC floated in March 2022 centered on Scope 3 emissions. Environmental advocates say that pollution constitutes the bulk of a company’s carbon footprint, but many in the industry say they are difficult to calculate and may give a false impression of a company’s environmental impact.

The proposal morphed into a political lightning rod on Capitol Hill once groups like the American Farm Bureau Federation complained that small food producers would be forced by their clients to measure and report their own emissions under the plan.

LEGAL CHALLENGES

It’s unclear whether the decision to scuttle Scope 3 in the final rule and other changes will be enough to stave off legal challenges from industry groups and attorneys general in more conservative-leaning states like West Virginia. On the flip side, the adjustments may make more likely litigation from environmental activists, who wanted the SEC to take a more stringent approach.

Despite the changes, Wednesday’s vote is expected to be contentious at the regulator. Regardless, it’s almost certain to gain approval from a majority of the agency’s five commissioners. Once that happens and the regulation is officially published by the U.S. government in the Federal Register, it’ll become effective two months later.

Compliance would be phased in over time, depending on the size of a company and the type of disclosure. Large companies would have to start reporting their greenhouse gas emissions in 2026, and smaller ones would have to start reporting in 2028. The smallest publicly traded companies would be exempt from Scopes 1 and 2 reporting.

The SEC also is planning to green-light a new rule on Wednesday to require stock brokerages that work with ordinary investors to disclose more price and trade execution information as part of a broader overhaul being advanced by the regulator.

 

With assistance from Lily Meier, Andrew Ramonas, Eamon Akil Farhat and Katherine Doherty.

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