Another piece of the Biden administration’s sweeping policy response to climate change fell into place on March 6, when the US Securities and Exchange Commission (SEC) voted to approve highly anticipated climate disclosure requirements for public companies.
Environmental advocates long pushed for such disclosures. But their immediate response was largely negative, with many saying the rule falls far short of what is needed and leaves investors lacking crucial information about climate risks.
“It’s a step forward, but we feel it’s too little, too late,” said Leslie Samuelrich, President of the sustainability-focused mutual fund company Green Century Funds. “Investors deserve better than where the SEC landed with its disclosure rule,” added Hana Vizcarra, a senior attorney at the group Earthjustice, in an emailed statement.
The SEC’s new rule, adopted in a 3-2 vote along party lines, is groundbreaking in that it requires public companies to make certain climate disclosures, mainly reporting of greenhouse gas emissions, for the first time. Large public companies will be required to disclose their direct, or Scope 1 and Scope 2, emissions. Notably, they must do so only if they deem them “material,” or significant to their bottom line.
What the new rule lacks, and what most disappoints sustainable investors and climate groups, is a requirement that businesses disclose the larger portion of their carbon footprint, or the indirect Scope 3 emissions linked to a company’s supply chain and customers. This is a significant watering down of what was first proposed in March 2022, critics charge, and is also less stringent than what is required in the European Union.
Investors already seek climate information to guide their decisions and many companies voluntarily disclose climate risks, which is what prompted the SEC to delve into the issue in the first place.
“It’s in this context that we have a role to play with regard to climate-related disclosures,” SEC Chair Gary Gensler said on March 6. “Today’s rules enhance the consistency, comparability, and reliability of disclosures. The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today.”
Sustainable investors and environmental groups are skeptical, however, and point to the absence of Scope 3 emissions as the main reason. Ceres, the Clean Air Task Force, the Sierra Club, and Public Citizen are among the climate groups that have raised concerns about the omission.
The most important climate information that investors say they need is greenhouse gas emissions data, said Allison Herren Lee, a former SEC Acting Chair and Commissioner and an attorney at Kohn, Kohn & Colapinto. “That’s the source of risk,” she said, adding that “only a sliver of that risk” is being disclosed under the agency’s new rule.
Lee also noted that the question of whether Scope 1 and 2 emissions are “material” is left to the discretion of companies, a change from the proposed rule. Companies may be “incentivized to conclude Scope 1 and 2 emissions are not material,” she said, or may try to game their emissions to be lower than if they had to disclose their emissions across the supply chain.
Even SEC Commissioner Caroline Crenshaw, a Democrat who voted for the final rule, expressed disappointment. The rule does “not have my unencumbered support,” she said, given that “important disclosures remain absent.”
The SEC said it weighed thousands of comments on the proposed rule before finalizing it. Industry groups and conservative lawmakers had voiced strong opposition, saying the commission was stepping beyond its jurisdiction with the rulemaking and that Scope 3 emissions disclosures would be onerous and costly for companies to report.
The Sierra Club and the Sierra Club Foundation said in a statement that theyare now weighing a move to challenge the commission’s “arbitrary removal of key provisions” from the final rule. Meanwhile, 10 Republican-led states, including West Virginia, Georgia, and Alaska, filed a petition for review on March 6 in the 11th Circuit Court of Appeals, alleging the SEC’s rule “exceeds the agency’s statutory authority” and calling it “an abuse of discretion.”
US-listed fertilizer producers will benefit from eased climate regulations after the SEC dropped Scope 3 emissions disclosure requirements. The ruling requires companies with more than $75 million in revenue to report Scope 1 and 2 emissions only. The omission of Scope 3 reporting covers emissions from customers and supply chains, which for fertilizer producers would include farm and ranching operations emissions. Agricultural industry groups also opposed the inclusion of Scope 3 reporting.