The US Securities and Exchange Commission (SEC) has adopted the long-awaited rule to enhance and standardise climate-related disclosures, with multiple changes compared to the original draft – something that SEC commissioner, Caroline Abbey Crenshaw, said represented “the bare minimum”. However, there has been a U-turn on including Scope 3 emissions.
The final rules require registered firms to disclose their material climate-related risks, alongside activities to mitigate or adapt to such risks, information about board oversight on climate-related risks and information on any climate-related targets or goals that are material to the registrant’s business or financial state.
From the beginning of the fiscal year in 2025, this will include the disclosure of short- and long-term physical climate risks to assets from weather events such as hurricanes, and information on purchases of carbon offsets, renewable energy credits and other climate-related spending.
Larger registrants will also be required to report certain ‘material’ greenhouse gas emissions, and, beginning in 2026, businesses who deem this information material or relevant will also be required to disclose their Scope 1 and Scope 2 emissions. This is a major change from the Commission’s 2022 draft rule, which had originally also included a requirement to disclose Scope 3 emissions – emissions, which Deloitte suggested, could account for more than 70% of the carbon footprint of most companies.
The original draft also required all registrants to report their greenhouse gas emissions – not just larger companies. Meanwhile, a requirement for companies to state the climate expertise of members of their board of directors, which was in the draft text, has been omitted entirely.
The rules, which were passed by the SEC by three votes to two, have been in development for a number of years, having first been proposed in March 2022. Since then, business leaders and conservative politicians have sought to discredit the rules citing “federal overreach”, leading some analysts to speculate that the SEC could be subject to multiple lawsuits over the rules.
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and public offerings,” said SEC chair, Gary Gensler.
“The rules will provide investors with consistent, comparable and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, alongside a requirement that climate risk disclosures be included in a company’s SEC filing, such as annual reports and registration statements, which will help make them more reliable.”
Investors kept ‘in the dark’ on critical information
However, not everyone shares Gensler’s optimism. Bramwell Blower, public affairs manager at ShareAction said he was disappointed that the SEC have scaled back their original proposals.
“We’re particularly concerned that the SEC’s new rules will not include Scope 3 emissions – those produced by companies’ supply chains and during use of their products – which represent the majority of most companies’ carbon footprint,” Blower continued.
“Greenhouse gas emissions pose very real material and financial risks to capital markets and companies’ value, as well as to people and the planet. It is therefore vital that investors have transparent access to comprehensive and consistent information regarding companies’ climate impacts and risks, to accurately assess their long-term value and make diligent decisions in light of the current climate emergency.”
The Sierra Club and Sierra Club Foundation, represented by Earthjustice, went even further in their criticism, saying that they are considering legal challenges to the SEC’s “arbitrary removal of key provisions from the final rule”, while also taking action to defend the SEC’s authority to implement such a rule.
“Allowing companies to continue hiding a full accounting of their climate pollution keeps investors, including the Sierra Club and our members, in the dark about critical information needed to make informed choices about companies’ financial risks, including risks stemming from the failure to invest in the transition to a decarbonised economy,” asserted Ben Jealous, executive director of the Sierra Club.
‘A wave of global requirements’
In contrast, KPMG US’s ESG leader, Rob Fisher, said that “regardless of whether it marks a watershed moment or a watered-down rule”, companies are now facing a wave of global requirements.
“Amidst these disclosure requirements, the organisations that view new reporting requirements as an integral part of their broader strategy will find themselves in a better position to realise the full value sustainability initiatives can bring to their business.”
On the elimination of Scope 3 from the SEC rule, Fisher added that it is still very much in scope for US multinationals and likely many private companies, with the EU, California and the ISSB all requiring Scope 3 reporting.
Bill Harter, principal ESG solutions adviser at Visual Lease, agreed: “This vote from the SEC should not change how businesses prioritise environmental reporting. While the SEC is not requiring Scope 3 emissions at this time, other jurisdictions are, which could impact companies that are based and/or do business there.
“Because a large portion of a company’s environmental impact is associated with their real estate, equipment and vehicles, the best place for organisations to start is with their lease portfolios. My advice would be to first gather, centralise and analyse these records to ensure that you have the data you need to become compliant.”
Meanwhile, Maria Lettini, CEO of the US Sustainable Investment Forum (USSIF) stressed that the rule should be seen as “a floor, not a ceiling” for companies to report how their business is adapting to a global economy transitioning away from fossil fuels. Investors “will continue to push for further standardisation of climate information”, as it has a clear financial impact on their portfolios.
“We applaud the SEC for enacting the first ever mandatory reporting on financial factors related to climate risk. This exercise of the agency’s authority to protect investors is an important first step in ensuring that investors have clear, comparable and reliable data for use in their investment decisions. Simply put, this rule will help investors assess climate risks more accurately.
“This new federal standard is an achievable floor of disclosure that many companies are already meeting. In 2022, 74% of companies in the S&P 500 disclosed information related to their climate risks. 45% US-listed companies report their Scope 1 and 2 greenhouse gas emissions, and 20% of firms report at least some of their Scope 3 emissions.
“While we are disappointed that the SEC chose to remove disclosure of Scope 3 emissions and add a trigger for disclosure of Scopes 1 and 2 in this final rule, companies will remain responsible to report material information to their investors. And, with new disclosure regimes coming to the market requiring Scope 3 reporting, companies not making this important information available to investors will continue to fall behind.”
