The Securities and Exchange Commission on Wednesday voted 3-2 to issue a final rule that requires certain U.S. companies to disclose their risks related to climate change and how they contribute to a warming planet via greenhouse gas emissions.
The 886-page rule — which follows a March 2022 proposal — establishes a disclosure framework "floor" for publicly listed companies, transparency that will help inform investors' decisions, according to Caroline Crenshaw, an SEC commissioner who voted in favor of the rule.
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Climate disclosures aren't mandatory under the current regime; companies make them voluntarily. They remain "uncommon in all but a few sectors," according to S&P Global.
The largest companies must start making some climate disclosures as early as fiscal 2025 and about greenhouse gas emissions as soon as fiscal 2026.
'A sensible rule to protect investors'
"Climate risk is financial risk," Elizabeth Derbes, director of financial regulation and climate risk for the Natural Resources Defense Council, said in a written statement.
"This is a sensible rule to protect investors: it gives them access to clear, comparable, relevant information on the measures companies are taking to manage climate risks and opportunities," Derbes said.
Overall, transparency around climate risk may be essential for investors to gauge if a company's stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it's well positioned?
Required disclosures include climate risks that have had — or are reasonably likely to have — a material impact on company business strategy, operations or financial condition, according to the SEC.
They also include a company's climate-related goals, transition plans, and costs and losses related to events like hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea-level rise, the SEC said.
"Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments," especially retirement investors who may have a timeline decades in the future, Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum, recently told Our.
Rule does not include 'Scope 3' disclosures
However, the rule is watered down from its initial version. Derbes and other observers say that dilution hinders investors' ability to accurately gauge risk.
For example, the final rule stripped out a requirement to disclose so-called Scope 3 greenhouse gas emissions. Such planet-warming emissions are those along a corporation's value chain like suppliers of raw material or by customers using a company's products.
For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.
"This is not the rule I would have written," Crenshaw said, citing omissions such as Scope 3 reporting. "They are a bare minimum," though ultimately better than no rule at all, she added.
Instead, the final rule will require companies report Scope 1 and 2 emissions if they're deemed material to investors. These are direct emissions caused by company operations and indirect ones from the purchase of energy (from renewable sources or coal-burning power plants, for example).
Only "large accelerated filers" and "accelerated filers" must disclose Scope 1 and 2 emissions. These categories include corporations with an aggregate global market value of $700 million or more, and $75 million or more, the SEC said.
Challenges could be forthcoming
The rule comes as the Biden administration pledged to cut U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to fight climate change in U.S. history.
It also follows other U.S. and international climate disclosure regimes, such as in the European Union and rules recently passed in California.
Congressional and legal challenges to the rule "are likely," Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote last week in a research note.
While proponents say the SEC rule is well within the scope of its mission to protect investors, others say the agency overstepped its authority.
The rule is "climate regulation promulgated under the Commission's seal," and "hijacks" the agency to promote climate goals, SEC Commissioner Mark Uyeda said before the vote Wednesday.
Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it "exceeds the [agency's] mission, expertise, and authority."
Gensler defended the rule as being consistent with a "basic bargain" in U.S. securities laws.
"Investors get to decide which risks they want to take so long as companies raising money from the public make ... 'complete and truthful disclosure,'" Gensler said in a written statement following the vote. "Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain."
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