The Securities and Exchange Commission (SEC) voted to enforce a new rule requiring publicly traded companies to disclose their direct greenhouse gas emissions, should the companies deem the information “material” to investors. The SEC had been expected to require that companies also report their indirect emissions but the agency dropped that requirement from the final rule.
Additionally, all U.S. companies must disclose how climate change could negatively affect their financial condition, for instance through floods, storms or drought. The SEC defines “material” as information investors should know before they buy shares.
The original proposal from the SEC mandated the disclosure of a company’s Scope 1, 2 and 3 emissions. Scope 1 refers to greenhouse gases directly emitted by a company; Scope 2 covers emissions from the fuel and energy a company buys; and Scope 3 relates to emissions produced by customers or suppliers.
Scope 3 was the most controversial because indirect emissions are laborious to calculate and impose the highest compliance cost on companies trying to count them. After a lengthy public comment period, including 4,500 letters and 24,000 comments, the Scope 3 requirement was dropped.
At over 800 pages, the official rule released by the SEC is incredibly detailed. While every company will need to understand it in its entirety, three new rules immediately jump out:
- “Accelerated filers” — defined by the SEC as companies with publicly traded shares worth $75 million or more — are required to disclose Scope 1 and 2 emissions.
- Costs incurred from the result of severe weather events and other natural disasters must be disclosed on financial statements.
- Actual and potential material impacts of climate-related risks to a company’s strategy, business model and outlook must be disclosed.
A former senior adviser at the SEC told GreenBiz that without the Scope 3 requirement, companies had more room to pick and choose what they disclose, misrepresenting their actual climate impact.
“The new rule, unfortunately, does little to prevent companies from making vague, untested and, most significantly, unsubstantiated, statements about their carbon footprints,” said former SEC commissioner Allison Herren Lee in a statement to GreenBiz. “It paves the way for greenwashing which, in capital markets, is just shorthand for very bad outcomes: mispriced risk and misallocation of capital.”
The SEC is currently estimating that around 2,800 U.S. companies will have to begin reporting climate-related financial risks. Companies in the accelerated filers category will have to begin reporting Scope 1 and 2 emissions in 2026.
Ten Republican-led states have already sued to stop the implementation of the new rules. They claim the SEC is overreaching by imposing requirements that could overwhelm companies with data-gathering that goes beyond the financial numbers that investors usually rely on. Some observers noted that by dropping the scope 3 requirement, the less strict version of the rule might be more likely to withstand legal challenges.
In the meantime, companies are best-advised to prepare to comply with the new rules, sources told GreenBiz.
“[Companies] are going to continue to face a lot of investor pressure,” said the former SEC senior adviser when asked about the impact of potential litigation. “The risks themselves are not going away.”
Nicole Labutong, a principal at RMI’s climate intelligence program, said, “companies may find that it is easiest to integrate GHG emissions calculations into existing annual accounting and reporting processes.” She also advised companies to plan for a period of educating their staff on the multiple requirements laid out in the rules, as well as emissions accounting and disclosing procedures.
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