SEC moves towards requiring corporate climate disclosures

The US securities regulator would force public companies to disclose their direct greenhouse gas emissions and have them verified by a third party, under long-awaited climate change risk rules proposed by the agency.

The proposal from the Securities and Exchange Commission would require companies’ annual reports to include data on their direct emissions and emissions derived from energy that they purchase, known respectively as scope 1 and scope 2 emissions. US companies and foreign businesses registered with the SEC would also need to annually disclose plans to reduce emissions.

SEC commissioners voted 3-1 to release the proposal for public comment, with Democrats in the majority. The regulator’s move comes as the Biden administration’s efforts to pass legislation to take more aggressive steps on global warming have stalled in Congress.

The most controversial climate risk disclosures are for so-called scope 3 emission, a broad measurement that includes products a company buys from third parties and business travel as well as the end use of goods sold by the company. Under the SEC proposal, these would need to be disclosed only if they were deemed “material” or part of companies’ climate targets. Scope 3 disclosures would not be subject to third-party verification and would be protected from legal liabilities.

If finalized, the rules would be the first mandatory disclosures issued by the SEC on climate risk. It also sets up a potential battle between companies and investors who have complained about the lack of consistency, standards and transparency over environmental damage.

Republicans attacked the proposal. Republican SEC commissioner Hester Peirce, the dissenter in Monday’s vote, said it would drive up costs for business while accounting firms and climate consultants were poised for a windfall. “Score one for the climate industrial complex,” she said.

Pat Toomey, a Republican senator from the natural gas and coal producing state of Pennsylvania, said that with inflation surging and “Russia waging an energy-funded war, the last thing the American people need are unelected regulators advancing policies by partisan vote that will cause energy costs to further rise “.

Environmental groups applauded the proposal, but also raised concerns with the SEC’s scope 3 reporting provisions. “We are concerned that scope 3 emissions disclosures are essentially left up to [companies] to determine the materiality of these emissions, ”said Ben Cushing, campaign manager for the Sierra Club’s Fossil-Free Finance campaign.

Notably, the proposed rules include phase-in periods for companies preparing to comply. Assuming that the rules are adopted by the end of this year, the SEC said that large companies would need to disclose scope 1 and 2 emissions in 2024 and scope 3 emissions in 2025 at the earliest.

The rules would also require companies that have issued emissions targets and climate plans to outline how they intend to reach those targets, and a timeframe. Disclosures about companies’ internal carbon prices and how they are set would also be necessary.

In an effort to combat greenwashing, businesses that are setting out a transition plan away from carbon emissions will be required to share the program’s details, metrics and targets.

Climate Capital

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