The Securities and Exchange Commission votes 3-2 to require companies to disclose their emissions and the climate risks they face
Corporations will have to share key details about their role in driving climate change and the threat that warming poses to their operations under a contentious proposal the Securities and Exchange Commission approved 3-2 on Wednesday over intense business opposition.
The rule, which had been delayed for more than a year as industry groups have threatened lawsuits, is less robust than the Wall Street regulator’s original climate disclosure plan, which would have forced public companies to account for not just their own emissions, but also those throughout their supply chains. But it still represents one of the most far-reaching measures by the federal government to push companies toward climate accountability at a time when many are taking neutral stances or facing accusations from activist investors that they areexaggerating their climate achievements.
The rule is one of the most highly anticipated in the SEC’shistory, generating some 24,000 comments from companies, trade groups, investors and climate activists.
“Investors have made abundantly clear that greenhouse gas emissions disclosures are necessary to understand the current and future risks to the financial condition of companies,” said Commissioner Caroline Crenshaw, a Democrat. “It is critical we give them the information they need to properly assess the risks.”
The two Republicans on the commission fiercely objected to the new requirements on corporations, laying the ground work for legal challenges in blistering dissents that warned that the mandateis an improper attempt by the SEC to force companies to adhere to a liberal climate agenda. Commissioner Mark Uyeda said the rule was driven by climate activists seeking to “hijack and use the securities laws for their climate related goals.”
The vote will have a potentially far-reaching impact on corporate America.
“This is going to impact a lot of different companies,” said Doug Chia, a fellow at the Center for Corporate Law and Governance at Rutgers Law School in New Jersey. “People will be able to track them based on what they are required to report, not just the company’s own spin on the data. You will start to be able to see which companies are doing a better job at dealing with climate change.”
The rule will test the powers of the federal government to compel companies to confront warming, making it significantly harder for businesses to gloss over their carbon footprints and vulnerability to climate change with green marketing campaigns and upbeat impact reports.
Under the rule, companies will need to reveal any losses as a result of extreme weather events fueled by global warming, including severe storms, raging wildfires and rising seas, according to an SEC outline shared with reporters. They also will need to reveal any expenditures related to their climate goals, such as purchases of carbon offsets or renewable energy credits.
In addition, large firms will need to report the greenhouse gas emissions generated at their own facilities that are “material” or relevant to investors, according to the SEC.
In a notable change from the SEC’s original plan, firms won’t need to report the emissions generated by customers and suppliers, known as “Scope 3” emissions. The provisions were dropped amid a substantial rewrite of the original proposal, as SEC Chair Gary Gensler sought to craft a rule that stands a strong chance of surviving legal challenges.
Hours after the SEC approved the rule Wednesday, West Virginia Attorney General Patrick Morrisey (R) announced that he will lead 10 Republican-led states in challenging the mandate in federal court. The suit will argue that the SEC lacks the authority to force companies to weigh in on “controversial” climate issues, he said.
“The Biden administration has once again gone on the attack against America’s energy industry,” Morrisey said at a news conference. “It may be one of the most egregious attempts yet.”
The commission’s prospects in court are uncertain. The Supreme Court in recent years has diminished the authority of federal agencies to advance ambitious regulations — particularly environmental regulations — without the consent of Congress. The success of the rule could hinge on the SEC’s ability to convince judges that the policy is not intended to drive companies to lower their emissions, but merely to require they share information investors need, which is a key role of the regulator.
Climate advocates are disappointed by the SEC’s decision to drop the Scope 3 requirements. They say it is crucial for companies to report Scope 3 emissions, which can account for up to 75 percent of overall emissions, according to the Principles for Responsible Investment, a U.N.-backed initiative.
“Avoiding Scope 3 reporting is stripping away the teeth from this rule,” said Tracey Lewis, a policy counsel for the climate program at the left-leaning advocacy group Public Citizen.
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Even with the scaled-down rule, many business groups say the SEC is overstepping its authority, attempting to use its position as a financial regulator to shame companies into curbing their carbon footprints. The new rule has especially rankled the oil and gas industry, which says the commission is unfairly punishing its industrial sector, a major source of climate-warming emissions.
“What is the goal here? Is it to de-capitalize oil, gas and coal?” said Kathleen Sgamma, president of the Western Energy Alliance, which represents oil and gas firms. “In that case, that is a major policy issue that is better decided by Congress.”
Many Republicans, for their part, have aggressively fought any rules that push companies to factor climate change into their business plans. GOP attorneys general have threatened to take legal action against Wall Street firms that prioritize climate risks when making investment decisions.
Yet the United States risks being left on the sidelines absent action from the commission. Financial regulators in California, the European Union, China and elsewhere are already moving forward with their own rules. Many U.S. companies are racing to meet these requirements, which are far more expansive than what the SEC is mandating.
California’s new law, signed by Gov. Gavin Newsom (D) in October, requires large companies doing business there, including private companies, to report on the carbon footprint from their supply chains. European rules require much the same.
Most major U.S. companies are doing business in both California and Europe, and thus will be subject to those rules, if they survive court challenges. In a lawsuit filed in January, business and agricultural groups argued that the California law tramples on companies’ First Amendment rights by requiring them to comment on a “politically fraught” topic — climate change.
“You have to ask yourself why some of these large corporations are fighting tooth and nail against a law that requires nothing more than data disclosure,” said California state Sen. Scott Wiener (D), who wrote the climate disclosure law there. “They don’t want the public to see how carbon-intensive they are. It is not a good look.”
Not every company is fighting the requirements. Firms such as UPS, Meta, Google and United Airlines are embracing the push for disclosure. But those that are resisting say the requirements would be unduly onerous and burden them with hefty costs, red tape and new liabilities.
“There were a lot of concerns about the sheerability to gather the data requested,” said Sarah Morgan, an attorney at Vinson & Elkins. “Most companies right now are not doing anything as broad or comprehensive as what the SEC is talking about.”
The debate over corporate disclosure is raging even as the economic toll of warming climbs. Last year, the United States saw a record 28 weather disasters that cost at least $1 billion each, including deadly wildfires in Maui and severe flooding in Vermont, according to the National Oceanic and Atmospheric Administration.
In Europe, some companies will be required to start reporting on their emissions and climate risk this year. The rules will initially apply to large European corporationsbut 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.
Last month, China’s three major stock exchanges announced new sustainability reporting guidelines for listed companies. Other countries with similar directives include Australia, Brazil, Britain and Singapore.
“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.
Under the rule approved Wednesday, large public companies will need to start reporting their financial exposure to climate-related risks such as severe weather events by 2025. They will have until 2026 to begin disclosing their emissions. Smaller corporations will be given more time.
