Long-awaited rules that will require some public companies to report their greenhouse gas emissions and climate risks have been approved by the SEC.

Some last-minute revisions weakened the rule, which was first proposed in March 2022, mainly due to strong pushback from companies. Regardless, it still just passed by a 3-2 vote at the agency.

The rule was one of the most anticipated in recent years from the top US financial regulator, drawing more than 24,000 comments from companies, auditors, legislators and trade groups. Approval brings the United States closer to the European Union and California in terms of corporate climate disclosure rules.

Publicly traded companies will be required to say more in their financial statements about the risks climate change poses to their operations, and their own contributions to the problem. But the version approved was weaker than an earlier draft, with changes that weren’t made public until the March 6 meeting.

“We require of our public company registrants disclosures of risks related to interest rates, commodity prices, how a board is informed of risks, changes of ownership, merger transactions — the list goes on.”

Caroline Crenshaw, Commissioner, SEC

Companies will be required to report Scope 1 emissions, which come directly from their operations, and Scope 2 emissions from energy purchases – but only if they are considered of material interest to investors. The narrowed rule no longer includes requirements that larger companies report some indirect emissions known as Scope 3. Those emissions don’t come from a company or its operations, but happen along its supply chain – for example, in the production of the dye that goes into a retailer’s clothing.

The rule also will require companies to report climate-related risks, such as floods, wildfires and droughts that could have a material impact on their bottom line. Steps taken to mitigate or adapt to climate risks will need to be disclosed, as well as losses incurred as a result of severe weather, the SEC said. 

Final rules

The final rules require a registrant to disclose, among other things:

• material climate-related risks; activities to mitigate or adapt to such risks;
• information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and
• information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.

And, to facilitate investors’ assessment of certain climate-related risks, the final rules require:

• disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material;
• the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and
• disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses.

The final rules include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.

Compliance phase-in

The final rules will require a registrant (including a foreign private issuer) to file the climate-related disclosure in its registration statements and Exchange Act annual reports filed with the SEC, and supply the mandated climate-related disclosures either in a separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing. (Those could be sections such as Risk Factors, Description of Business, or Management’s Discussion and Analysis, etc.)

The final rules will become effective 60 days after publication in the Federal Register and phased in for all registrants with the compliance date, dependent upon the status of the registrant as a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or emerging growth company, and the content of the disclosure.

A safe harbor from private liability will be granted for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals.

Dissenting voices

In her dissenting opinion partially titled Green Regs and Spam, Hester Peirce said even the more relaxed rules would not convince her they were appropriate for the SEC to impose on businesses. She said “the changes do not alter the rule’s fundamental flaw – its insistence that climate issues deserve special treatment and disproportionate space in Commission disclosures and managers’ and directors’ brain space”.

She countinued: “The Commission does not persuasively explain why principles-based rules, staff disclosure review, and enforcement actions are not effective in eliciting the climate disclosure the objectively reasonable investor needs.”

Commissioner Mark Uyeda was considerably barbed in his dissenting statement. “Today’s rule is the culmination of efforts by various interests to hijack and use the federal securities laws for their climate-related goals. In doing so, they have created a roadmap for others to abuse the Commission’s disclosure regime to achieve their own political and social goals,” he said.

The Chamber of Commerce business group issued a statement on the rule, acknowledging the softening of the original rule’s requirements, but calling it a “novel and complicated” one that it is still evaluating.

SEC is not a climate regulator

Commissioner Caroline Crenshaw addressed one of the main critiques of the rule and the SEC in promulgating it – namely, the one about the SEC veering out of its lane – in a statement defending the new reporting regulations.

“It is said that we are not an environmental agency and that we should not be in the business of supporting green agendas or setting pollution standards. Those statements are true,” she said. “But, we are in the business of requiring public company disclosure about risk. We have done it myriad times without having our authority questioned.

“We require of our public company registrants disclosures of risks related to interest rates, commodity prices, how a board is informed of risks, changes of ownership, merger transactions – the list goes on. That the term ‘climate’ has become a buzz word should be of no moment to a clear-eyed Commission. It should not compel us to shy away from our duties and obligations to investors.”

The new rule will face legal challenges from industry and environmental groups, plus some state attorneys general (AGs). Indeed, just hours after it was announced, West Virginia Attorney General Patrick Morrisey said he was initiating a lawsuit that will challenge the climate-related reporting. Nine other state Republican AGs will join him.

Speaking at Yale Law School last month, SEC Chair Gary Gensler he said he thought the regulations would stand up to legal challenges, saying the new disclosures would “benefit capital markets” and make sure investors have access to material information.