SEC floats mandatory disclosure of climate change risks and emissions

WASHINGTON—U.S. regulators have proposed tough requirements for publicly traded companies to report information about greenhouse gas emissions and climate change risks, in one of the world’s potentially most significant environmental actions. Biden administration to date.

The Securities and Exchange Commission on Monday formally released a 534-page proposal that would require publicly traded companies to report greenhouse gas emissions from their own operations as well as the energy they use, and obtain independent certification of their estimates.

In some cases, companies would also be required to report greenhouse gas emissions from their supply chains and consumers, known as scope 3 emissions. An SEC official said the Most S&P 500 companies should probably report Scope 3 emissions. Companies should include the information in SEC filings, such as annual reports.

The proposal comes as President Biden’s efforts to address global warming through legislation have stalled in Congress, pressuring regulatory agencies to address a fundamental Democratic priority. That drew criticism from Republicans, who accused Democratic SEC Chairman Gary Gensler of abuse.

Gensler says investors and asset managers representing tens of trillions of dollars have called for more standardized corporate climate-related disclosures. While hundreds of companies have already started reporting data on their carbon emissions and other climate-related metrics, SEC officials say current disclosures are inconsistent and difficult for investors to compare.

“Businesses and investors would benefit from the clear rules of conduct offered in this release,” Gensler said in a statement.

Meredith Cross, a partner at the corporate law firm WilmerHale and former SEC Division Director, said the proposed rule is “the most expansive, comprehensive and complicated disclosure initiative in decades.”

SEC members voted 3-1 to release the proposal, which will be open for public comment for at least two months before the agency begins work on a final rule. The commissioners voted along party lines, with all three Democrats backing the proposal.

The new requirements are a feature of Democratic SEC Chairman Gary Gensler’s ambitious policy agenda.


Bill Clark/Associated Press

Republicans and some industry groups have been preparing for months to fight the new demands, which characterize Mr. Gensler’s ambitious policy agenda. They say the proposed rules would increase compliance costs and go far beyond a strict interpretation of the SEC’s mandate to protect investors by requiring the disclosure of relevant information about companies’ financial performance.

“Today’s action hijacks the democratic process and fails to respect the limited scope of authority that Congress has given to the SEC,” Sen. Pat Toomey (R., Pa.) said in a statement sent by e-mail. “This is a thinly veiled effort to have unelected financial regulators set America’s climate and energy policy.”

Democrats in Congress and members of the Biden administration have framed the proposal as the fulfillment of a key promise by the president to fight climate change.

“Investors and companies have been asking for years for reliable information that can be used to assess climate-related risks and opportunities,” Treasury Secretary Janet Yellen said in a statement, adding that the rule will protect investors and make the more resilient financial system. The Financial Stability Oversight Board, which Ms. Yellen heads, formally identified climate change as an emerging and growing risk to U.S. financial stability last year.

SEC commissioners, staff and advisers spent months negotiating the outlines of the proposal. Their challenge is to balance two conflicting goals: to make as much information about climate change and associated risks public as they can reasonably demand of companies, and to craft rules that stand up to legal scrutiny by federal courts that have become increasingly conservative.

A sticking point in the deliberations was the circumstances under which the SEC would mandate disclosure of Scope 3 emissions, which is typically much larger than a company’s direct greenhouse gas output. But companies struggle to accurately estimate emissions from their suppliers, who may not offer their own greenhouse gas output calculations, or customers who use their products and services.

The rules proposed on Monday would allow businesses some flexibility. Disclosure of Scope 3 emissions would only be mandatory if the production of those greenhouse gases is material or significant to investors, or if companies set specific targets for them.

For example, if a company announces its intention to achieve “net zero” emissions by a certain date, it will have to specify whether this objective includes all greenhouse gas emissions. If so, disclosure of its Scope 3 emissions should be included in its filings with the SEC from 2025 for large companies. Companies would not, however, be required to obtain independent assurance that their Scope 3 estimates are accurate and would not be liable for the estimates if provided in good faith.

Money is a sticking point in global climate change negotiations. As economists warn that limiting global warming to 1.5 degrees Celsius will cost many more billions than expected, the WSJ examines how the funds could be spent and who would pay. Illustration: Preston Jessee/WSJ

Many regulators claim that the threats that global warming poses to businesses fall into two categories: first, the so-called physical risks posed to a company’s facilities and operations by the increased frequency of extreme weather events ( droughts, floods, wildfires and hurricanes) in areas where such events were rare. Second, “transition risks” resulting from efforts to both wean the economy off fossil fuels and prepare for the effects of climate change.

The SEC’s proposal would require publicly traded companies to include estimates of the impact of both sets of risks in their financial statements. Companies should also provide broader explanations of their long-term vulnerabilities to climate change and their processes for addressing these concerns.

Republican SEC Commissioner Hester Peirce voted against the proposal and released a 6,300-word dissenting statement, not including footnotes.

“We are laying here the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in breadth and cost, and likely surpass it in complexity,” Ms. Peirce said. She warned that the proposed rules will enrich “the climate-industrial complex” while hurting investors, the economy and the SEC.

The U.S. Chamber of Commerce said companies already provide strong reporting on environmental issues and said the SEC’s proposal was too prescriptive and could lead to filings that aren’t material to investors.

“The Supreme Court has made it clear that any disclosure required under securities laws must meet the materiality test, and we will oppose any provisions of this proposal that deviate from that standard or are unnecessarily broad,” it said. Tom Quaadman, Leader of the Chamber Capital. – market division.

While companies in the energy and transportation sector have opposed sweeping climate disclosure requirements, other industries and investor groups have lent their support. The Investment Company Institute, which represents asset managers, said it was happy with some aspects of the SEC’s proposal but said it will “carefully consider” the approach to Scope 3 disclosures.

“Having consistent, comparable and reliable data enables fund managers to better assess current and future sustainability risks on behalf of the millions of investors who invest in their funds,” said ICI’s Chairman. , Eric Pan.

The requirements outlined Monday would significantly increase disclosure of companies under SEC scrutiny. The United States is seen by some as having lagged behind other jurisdictions in climate reporting in recent years.

Mr Biden, who nominated Mr Gensler last year, said in his 2020 campaign platform that there is no greater threat than climate change. He promised to cut carbon emissions and invest in more sustainable energy. Democratic legislation that would have devoted significant funding to such efforts died in the Senate last year, though Mr. Biden’s plans on climate change have regained momentum more recently.

Regulators were quicker to act. For example, the Environmental Protection Agency has developed rules that limit the use of cooling chemicals that are potent greenhouse gases, and rules aimed at reducing emissions from passenger cars and trucks. The agency also announced preliminary measures to limit greenhouse gas emissions from the oil and gas industry.

Write to Paul Kiernan at [email protected]

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