SEC Scales Back New Pollution-Disclosure Rules

What You Need to Know

Under the final rules, publicly traded companies would have to disclose actual or potential material impacts of climate-related risks.
The regulator won’t force companies to quantify pollution from their supply chains or customers, known as Scope 3 emissions.
Compliance would be phased in over time, depending on the size of a company and the type of disclosure.

The Securities and Exchange Commission will force companies to disclose their greenhouse gas emissions for the first time, but watered down a key requirement after heavy lobbying from industry groups.

After receiving thousands of comment letters and numerous litigation threats, the SEC is set to impose climate-disclosure requirements that will be significantly softer than those it proposed in March 2022.

In the biggest change, the regulator won’t force companies to quantify pollution from their supply chains or customers, known as Scope 3 emissions. Additionally, firms will face a higher bar for when they need to reveal more direct carbon footprints in their regulatory filings, which are known as Scope 1 and Scope 2 emissions.

The vote to finalize the regulations caps months of intense debate inside the agency and in the halls of Congress over what’s been billed as one of Washington’s signature efforts to address climate change during the Biden era.

By pursuing the rule, SEC Chair Gary Gensler has been accused by opponents of seeking to expand the commission’s jurisdiction beyond securities into climate issues.

Gensler has vigorously pushed back on that claim, arguing that many investors want the information to guide their decisions. Currently, publicly traded companies use an unstandardized mix of voluntary metrics.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information,” Gensler said in remarks for the meeting. “It’s in this context that we have a role to play with regard to climate-related disclosures.”

Complicating the situation are differing requirements across the globe and in at least one US state.

The SEC’s regulations seek to address that by for the first time providing federal baseline requirements for companies to discuss business risks and opportunities associated with a changing climate. The regulations also may make it easier for investors to compare the environmental impact of firms in the same industry.

‘Primary Audience’

Cynthia Hanawalt, director of Columbia University’s Sabin Center for Climate Change Law’s financial regulation practice, said that there are big financial risks and opportunities linked to climate impacts and the clean energy transition. “Investors are the primary audience,” she added.

However, the SEC requirements will be markedly less stringent than regulations passed last year by lawmakers in California and the European Union.

For example, California’s emissions disclosure law requires large public and private companies doing business in the state that generate more than $1 billion of annual revenue to publicly disclose Scope 1 and 2 emissions every year starting in 2026 and Scope 3 emissions in 2027. The state’s regulations are already being challenged in court.