The U.S. Securities and Exchange Commission on Wednesday approved a rule that will require some public companies to report their greenhouse gas emissions and climate risks, after last-minute revisions that weakened the directive in the face of strong pushback from companies.
The rule was one of the most anticipated in recent years from the nation’s top financial regulator, drawing more than 24,000 comments from companies, auditors, legislators and trade groups over a two-year process. It brings the U.S. closer to the European Union and California, which moved ahead earlier with corporate climate disclosure rules.
The SEC rule passed 3-2, with three Democratic commissioners supporting it and two Republicans opposed.
Since the SEC proposed a rule two years ago, experts had said it was likely to face litigation almost immediately. SEC Chairman Gary Gensler, one of the Democrats, acknowledged that was a factor the agency considered as it worked toward a final rule.
“We’ve seriously considered what people have said about our legal authorities,” Gensler said on Wednesday.
The changes in the rule weren't made public until Wednesday's meeting. The weakened rule doesn't require companies to report some indirect emissions known as Scope 3. Those don’t come from a company or its operations, but happen along its supply chain — for example, in the production of the fabrics that make a retailer’s clothing — or that result when a consumer uses a product, such as gasoline.
It also reduces reporting requirements for other types of emissions known as Scope 1 — direct emissions — and Scope 2, indirect emissions that come from the production of energy a company acquires for use in its operations. Companies would only have to report those emissions if they believe they are “material” — in other words, significant — a decision that allows companies to decide whether they need to disclose. And smaller companies don’t have to report emissions at all.
Companies, business groups and others had fiercely opposed the Scope 3 requirements, arguing that quantifying such emissions would be difficult, especially in getting information from international suppliers or private companies. The SEC cited that opposition in dropping Scope 3.
Environmental groups and others in favor of more disclosure had argued that those emissions are usually the largest part of any company’s carbon footprint and that many companies are already tracking such information.
The U.S. Chamber of Commerce, which strongly opposed the rule and is already suing over California's rule, said it was still reviewing the final version on Wednesday.
“While it appears that some of the most onerous provisions have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors,” said Tom Quaadman, executive vice president of the chamber’s capital-markets group.
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Soon after the SEC's vote, West Virginia Attorney General Patrick Morrisey announced that 10 states were filing a challenge with the U.S. Court of Appeals for the 11th Circuit.
SEC Commissioner Hester Peirce, a Republican who opposed the rule, said it would be burdensome and expensive for companies and would trigger a flood of inconsistent information that would overwhelm, not inform, investors.
“However well-intentioned, these particularized interests don’t justify forcing investors who don’t share them to foot the bill,” Peirce said.
Commissioner Caroline Crenshaw was one of the Democrats who supported the rule, but she called it “a bare minimum" that unnecessarily limits disclosures.
Massachusetts Democratic U.S. Sen. Elizabeth Warren used similar language. She said she was disappointed by the SEC's decision to "significantly weaken the rule in response to an onslaught of corporate lobbying.”
Approval of the rule comes as climate change is contributing to more extreme and costly weather events around the world. The U.S. alone set a record last year for the number of weather disasters that cost $1 billion or more.
The final rule will affect publicly traded companies in the U.S. ranging from retail and tech giants to oil and gas majors. Required disclosures will include the expected costs of moving away from fossil fuels, as well as risks related to the physical impact of storms, drought and higher temperatures intensified by global warming.
The SEC estimates that roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the U.S. will have to report climate information. The largest companies will have to start reporting emissions for fiscal year 2026. Smaller companies will have to disclose some information for fiscal year 2027, but not emissions.
The SEC has repeatedly said many companies already report such information, and that investors are making decisions based on it.
“It’s in this context that we have a role to play with regard to climate-related disclosures,” Gensler said on Wednesday.
Many Republicans and some industry groups accused Gensler, a Democrat, of overreach. Their criticism has largely centered on whether the SEC went beyond its mandate to protect the financial integrity of security exchanges and investors from fraud.
Coy Garrison, an attorney who advises companies on SEC reporting and disclosure requirements, said dropping Scope 3 was unlikely to deter litigation. Garrison said the amount of information companies will still have to disclose and the related costs “will continue to raise concerns that the SEC is acting beyond its statutory authority."
Suzanne Ashley, a former special counsel and senior advisor to the SEC’s enforcement director and founder of Materiality Strategies, a company that advises companies on issues including regulation, saw it differently.
Ashley said the removal of Scope 3 requirements and other modifications put the final version “squarely within the SEC’s existing statutory authority to require clear and comparable disclosure of information necessary for the protection of investors.”
California's measure passed last October requires both public and private companies operating in the state with more than $1 billion in revenue to report their direct and indirect emissions, including Scope 3. The European Union also adopted sweeping disclosure rules that will soon take effect.
“All public companies need to digest the final rules," said Michael Littenberg, an attorney at Ropes & Gray on the SEC's action. "Based on how the rules are set up, there isn’t a one-size-fits-all approach.”
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