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SEC Adopts Scaled-Back Climate Disclosure Rules

S.J. Steinhardt
Published Date:
Mar 7, 2024

The Securities and Exchange Commission (SEC) voted to adopt rules to enhance and standardize climate-related disclosures by public companies and in public offerings, multiple news organizations reported. But they are weaker than those that the SEC originally proposed two years ago.

“The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules,” the SEC said in its announcement.

The SEC also published a fact sheet and details about the final rules. 

The SEC scaled back its original 2022 proposal, which has generated more than 24,000 comments, to exclude the requirement that public companies disclose what the Environmental Protection Agency (EPA) calls Scope 3 emissions, and to exempt many smaller companies. Scope 3 emissions "are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain," the EPA has stated. They account for roughly 70 percent of greenhouse gases produced by many businesses, according to The Wall Street Journal.

Environmental groups objected to that omission.

“Unfortunately, the SEC has stripped that key metric from its final rule, leaving investors in a really tough spot,” said Clara Vondrich, senior policy counsel for the consumer group Public Citizen, in an interview with the Journal. The Sierra Club said it was “considering challenging the SEC’s arbitrary removal of key provisions from the final rule,” The New York Times reported.

The final rules also exclude a proposed requirement that companies state the climate expertise of members on their board of directors, the Times reported.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” said SEC Chair Gary Gensler in the SEC's announcement. “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, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Many business groups, particularly those in the oil and gas industry, claim that the SEC is overstepping its authority.

“What is the goal here? Is it to de-capitalize oil, gas and coal?” asked Kathleen Sgamma, president of the Western Energy Alliance, which represents oil and gas firms, in an interview with The Washington Post. “In that case, that is a major policy issue that is better decided by Congress.”

West Virginia Attorney General Patrick Morrisey announced that he will lead 10 Republican-governed states—his own, plus Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming and Virginia—in challenging the mandate in federal court, the Post and the Times reported. The lawsuit will allege that the SEC lacks the authority to force companies to weigh in on “controversial” climate issues, he said at a press conference. This is a backdoor move to undermine the energy industry," Morrisey said.

“The opposition that we’ve seen is largely driven by the fact that we have a huge fossil fuel industry and lobby in the United States,” said Cynthia Hanawalt, director of financial regulation practice at the Sabin Center for Climate Change Law at Columbia Law School, in an interview with the Times. “That’s why there’s such tremendous opposition here that has not come up in other jurisdictions around the world that are putting forward similar climate-related disclosure rules.”

Firms such as UPS, Meta, Google and United Airlines are embracing the push for disclosure, the Post reported, but those that are resisting decry what they claimed to be onerous requirements.

“There were a lot of concerns about the sheer ability to gather the data requested,” Sarah Morgan, an attorney at Vinson & Elkins, told the Post. “Most companies right now are not doing anything as broad or comprehensive as what the SEC is talking about.”

Some European companies will be required to start reporting on their emissions and climate risk this year, the Post reported. The rules, which will initially apply to large European corporations, could eventually affect more than 3,000 American companies and 1,300 Canadian firms, according to an analysis by the Global Reporting Initiative, an international organization whose work has informed the E.U. framework.

“As the international standards get implemented, that will affect more and more U.S. companies that are operating in those regions,” said Steven M. Rothstein, the managing director of the Ceres Accelerator for Sustainable Capital Markets, which works with businesses to improve sustainability, in an interview with the Post.

“Voluntary reporting is all over the map,” Asaf Bernstein, said associate professor of finance at the University of Colorado at Boulder, who consulted with the SEC on the rules, in an interview with the Journal. “Standardization is something you can use as a decision tool as an investor.”

But some companies are already voluntarily reporting more information about their emissions and the risks posed by climate change, said Amelia Miazad, a professor at the University of California, Davis, School of Law, in an interview with the Times.

“There’s clear investor demand for the information, and so the business community will have to respond to that demand,” she said.

The AICPA is in favor of the SEC's final rules, which “bring much-needed clarity for businesses and investors on climate-related information and the reporting disclosures required of U.S. companies,” said Susan Coffey, CEO of public accounting for the AICPA and CIMA,  in a statement reported by CPA Practice Advisor.

“The final SEC rule requires assurance over greenhouse gas emissions, with some companies obligated to move from limited to reasonable assurance over time,” she said. “We believe CPAs are best suited to undertake these engagements, especially when making connections back to a company’s financial statements.”

Gensler said last month that he thought the regulations would stand up to potential legal challenges because the SEC’s mandate is to ensure investors get the information they need.

“We are not a climate regulator. We are not a climate risk regulator," he told an audience at Yale Law School at the time. "We’re a securities regulator."

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