SEC Adopts Weakened Climate Disclosure Rules

Last updated at 4:13 p.m. March 6

Passed by a 3-2 vote, the new rule will require covered entities to disclose a variety of details regarding climate-related risks, strategies and governance and, for some companies, information about material Scope 1 and Scope 2 emissions. Notably, the final rule eliminated a requirement to disclose Scope 3 emissions and exempts many types of companies from having to report emissions at all.

Since it was proposed in March 2022, the SEC’s proposal has received thousands of public comments, about 24,000, SEC Chairman Gary Gensler said during the agency’s Wednesday meeting, and was the source of a great deal of political backlash. A vote was initially expected in October before being delayed to April, with the agency issuing a public alert just one week before its March 6 meeting.

According to the rules passed Wednesday, subject to requirements to report “material” Scope 1 and Scope 2 emissions, assuming they are not otherwise exempted, are large accelerated filers and accelerated filers, which are filing categories determined by the value of stock in the hands of public investors. 

“The SEC’s groundbreaking ruling is a historic step towards corporate transparency, mandating U.S.-listed companies to disclose climate-related risks, emissions and environmental strategies,” said William Theisen, CEO of EcoAct North America, a climate consultancy. “While this marks a significant milestone, the omission of mandatory Scope 3 emissions reporting is a disappointment, as this critical component in the climate puzzle remains voluntary.”

Scope 3 emissions, or indirect upstream and downstream greenhouse gas emissions, are estimated to account for as much as 95% of companies’ carbon impact. 

Many observers had speculated that the agency’s plan to delay its vote to 2024 would allow it to align with new rules in the European Union and California, both of which require Scope 3 GHG emissions reporting. (California’s new law has since been hit with a lawsuit, though it remains in effect as of this writing.) 

Given that final rules were expected last year and in light of other emerging regulations in the U.S. and beyond, most companies affected by climate reporting requirements have spent months and years preparing for them, though how prepared they are varies by the organization. A survey by Workiva, an ESG software provider, found that about two-thirds of executives at surveyed organizations were concerned about being able to comply with new regulatory requirements.

“The decision to scale back certain aspects of the proposal, like Scope 3 emissions, should mean little for how organizations plan to execute their climate strategies,” said Nithya Das, chief legal officer of Diligent, a governance software provider. “In addition, the requirement for issuers to disclose whether they have certain processes in place around climate, including scenario analysis and an internal cost of carbon, means that organizations with mature climate programs are likely to be more competitive.”

But while business groups may find compliance easier under the final rules, environmental groups criticized the agency’s decision to scale back its original proposal.

“This watered-down rule on climate risk disclosure is a departure from international norms and best practices,” a statement from Stop the Money Pipeline reads. “As regulators around the globe, including those in China and the European Union, advance their regulatory frameworks to include rigorous climate risk disclosures, the SEC’s proposed rule lags, jeopardizing the United States’ position in the global market.”

And the reliance on companies’ materiality assessments will dilute the rule’s efficacy, leaving investors in the dark about the climate risks and financial implications associated with their investments, said Jackie Fielder, co-director of Stop the Money Pipeline.

In addition to dropping the requirement that companies report their Scope 3 emissions, the rule also provides more time to file disclosures depending on filing status and content of the disclosure. Other modifications from the original proposal include:

• Adopting a less prescriptive approach to certain of the final rules, including, for example, the climate-related risk disclosure, board oversight disclosure, and risk management disclosure requirements.
• Qualifying the requirements to provide certain climate-related disclosures based on materiality, including, for example, disclosures regarding impacts of climate-related risks, use of scenario analysis and maintained internal carbon price.
• Eliminating the requirement to describe board members’ climate expertise.
• Eliminating the requirement for all registrants to disclose Scope 1 and Scope 2 emissions and instead requiring such disclosure only for large accelerated filers (LAFs) and accelerated filers (AFs), on a phased-in basis and only when those emissions are material and with the option to provide the disclosure on a delayed basis.
• Exempting smaller reporting companies (SRCs) and emerging growth companies (EGCs) from the Scope 1 and Scope 2 emissions disclosure requirement.
• Modifying the assurance requirement covering Scope 1 and Scope 2 emissions for AFs and LAFs by extending the reasonable assurance phase in period for LAFs and requiring only limited assurance for AFs.
• Removing the requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant’s consolidated financial statements.
• Focusing the required disclosure of financial statement effects on capitalized costs, expenditures expensed, charges and losses incurred as a result of severe weather events and other natural conditions in the notes to the financial statements.

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