Editor's note: This article has been updated to include further comments. 

The U.S. Securities and Exchange Commission (SEC) has adopted rules requiring public companies to report climate-related risks and related information, aiming to provide consistency, transparency and clarity for investors in a landmark move.

The novel rule, a diluted version of more stringent regulations first proposed about two years ago, is expected to draw lawsuits. The 3-2 vote on March 6 was made amid continued global focus on efforts to lower greenhouse-gas emissions and as many companies adjust business strategies with sustainability and climate in mind.

“With the broad interests this rulemaking has received, inevitably some will view it is having gone too far, while others will see it as not having gone far enough,” said SEC Commissioner Jaime Lizárraga. “An old familiar saying comes to mind: we must not let the perfect be the enemy of the good. My judgment: this final rule while not perfect strikes the appropriate balance and is sufficiently robust to warrant the commission’s approval.”

The regulation requires companies to report in their registration statements and annual reports information about greenhouse-gas emissions, weather-related risks and other climate-related information that could have a material business impact.

Smaller companies are exempt from reporting their GHG emissions.

For larger companies, reporting requirements include Scope 1 emissions, which are emissions a company produces from its own operations, and Scope 2 emissions, which are indirect emissions associated with the purchase of electricity, steam, heat or cooling—if material. According to the U.S. Environmental Protection Agency, Scope 2 emissions result from a company’s use and physically occur at the facility where they are generated.

The rules generated about 24,000 comments, which led to a revamped final version — to the ire of some commissioners.

Unlike the original proposed rules, the final version scrapped mandates that would have required larger companies to report data on Scope 3 emissions. Such emissions result from activities from assets not owned or controlled by the reporting company. Also removed were requirements for expenditure reporting, requiring line item disclosures in financial statements related to financial estimates and assumptions impacted by transition activities.

Companies are required to disclose climate-related risks that have had or are likely to have a material impact on their business strategy, results of operations or financial condition along with the actual and potential impact. Companies must also give a description of material expenditures incurred and impacts on financial estimates that directly result from such mitigation or adaptation activities, if they attempted to mitigate a climate risk.

It also requires companies reveal climate-related targets or goals among several other disclosures.

Many companies already voluntarily provide some of the information, mainly in sustainability reports published on their own.

Commissioners were divided on the SEC’s role in assessing certain climate-related risks for investors.

“The rule replaces our current principles base regime with dozens of pages of prescriptive climate related regulations,” Commissioner Hester Peirce said. “While the commission has decorated the final rule with materiality ribbons, the rule embraces materiality in name only. The resulting flood of climate related disclosures will overwhelm investors, not inform them.”

Reaction to the long-awaited vote was mixed.

“We are incredibly disappointed with their ruling and unequivocally disagree with it,” Dan Romito, a consulting partner with Pickering Energy Partners, said in a statement. “However, we have been stressing to the broader industry that what we think does not necessarily matter – the SEC was always incredibly motivated to pass this rule.”

He added that the ruling is likely to be litigated but encouraged the energy industry to “prepare accordingly.”

The American Council on Renewable Energy (ACORE) said it appreciated the SEC’s objectives to provide investors with climate-related information.

“Clean energy stands at the heart of efforts to address climate change, and we believe renewable generation, use, provision, and investment are important material considerations in corporate climate disclosures,” Lesley Hunter, senior vice president of policy and engagement for the American Council on Renewable Energy, said in a statement.

The final rules include a phased-in compliance period, and the compliance date will vary depending on the company’s filer status and content of the disclosure.

Divided viewpoints

Split along political party lines, commissioners were divided on the rules. Some voiced concerns that the scaled-back rules should have been re-proposed to gather additional public feedback on the changes.

Commissioner Hester Peirce—a Republican appointed by former President Donald Trump—opposed the final rules, saying the SEC’s existing disclosure regime already mandates companies to tell investors about material risks and trends. That includes climate-related issues, she said, as it relates to a company’s financial position.

Plus, there are concerns about costs.

“The rule’s anticipated benefits do not outweigh the costs. Proponents of a Commission climate rule hope that it will yield more accurate, comparable, and complete climate disclosures. If we do not look at it too closely, the final rule might appear to fulfill those hopes,” Peirce said. “But a closer inspection brings us crashing back to the reality that many climate disclosures are high-priced guesses about the present and future. Measurement and reporting are not standardized within companies, let alone across companies.”

Commissioner Mark Uyeda, a Republican, called the rule a “culmination of efforts by various interests to hijack and use the federal securities laws for their climate-related goals,” creating a roadmap for others.

“The Commission is a securities regulator without statutory authority or expertise to address political and social issues,” Uyeda said.

Commissioner Caroline Crenshaw, a  Democrat who voted in favor of the rules, said the commission does not lack authority to enact such requirements. Public disclosure regimes are meant to be updated by the SEC, just like it was in the past in response to investor calls for information about executive compensation, environmental protection law compliance and legal proceedings, she said.

“It is our obligation to respond to investors as the information needed to better assess the fundamental value of the securities they research, buy, sell and hold evolves or changes,” Crenshaw said.

Chairman Gary Gensler shared similar sentiments and pointed out disclosure updates going back to the 1990s.

“Our vote today is on rules, not just guidance, and ones that require disclosures be filed, not just posted online. Today’s rules enhance the consistency, comparability, and reliability of disclosures,” said Gensler, a Democrat appointed by President Joe Biden. “The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today.”

‘Wave’ of requirements

Business leaders are already keeping tabs on environmental risks. A recent survey released by KPMG found that 90% of business leaders said they will increase ESG investments in the next three years. Results from the firm’s 2023 CEO Outlook revealed nearly 60% of the U.S.-based CEOs expect to see significant returns from their ESG investments in the next three to five years, with 24% predicting one to-three years.

“Regardless of whether it marks a watershed moment or a watered-down rule, companies are now facing a wave of global requirements,” KPMG U.S. ESG Leader Rob Fisher, told Hart Energy. “Amidst these disclosure requirements, the organizations that view new reporting requirements as an integral part of their broader strategy will find themselves in a better position to realize the full value sustainability initiatives can bring to their business.” 

KPMG ESG Audit Leader Maura Hodge added the voluntary climate and sustainability reporting frameworks of the past have become a patchwork.

“Companies have real work to do to understand their various reporting mandates, while navigating dual challenges of continued policy uncertainty and heightened compliance risks,” Hodge said. “Organizations complying with the E.U.’s CSRD [Corporate Social Responsibility Directive] requirements might be doing 75% of the work to comply with the SEC. This overlap raises the question of equivalence and whether jurisdictions can recognize other rules, reducing the burden on companies.”

Hodge also stressed the importance of connecting climate risk to financial statements.

“The challenge for CFOs will continue to be defining severe weather events and the dollars attached to them,” Hodge added. “Too little and a company is under-reporting risks, too much and companies will blur useful and non-useful information. Working through that ambiguity will be critical.”

Bessie Antin Daschbach, partner at Hinshaw & Culbertson, said the outcome was not entirely surprising. She, like others, anticipate litigation challenging the SEC’s rule-making authority on the matter or the First Amendment.

She pointed out that the SEC’s rule is only one in a broader ESG landscape. This includes the EU’s CSRD and regulations in California—both of which include Scope 3 emissions.

“Given that, businesses should continue to analyze whether those existing (and possibly forthcoming) other frameworks impact them directly or, to the extent they are in the value or supply chains of entities reporting under those other frameworks, whether they will be required to collect and relay data up those chains,” she said. “Businesses should turn to their counsel for help on these fronts.”

Comments