The US securities regulator has enacted a rule that for the first time will require company disclosures on climate risks, even as the measure lacks some bolder mandates included in an initial proposal two years ago.
The Securities and Exchange Commission’s long-awaited, contentious rule is a pillar of chair Gary Gensler’s agenda. While the SEC has previously issued guidance on disclosure related to climate change, the new measure approved on Wednesday marks the first time the agency has crafted a rule specifically dedicated to it.
“Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about climate risk” since the last guidance was issued in 2010, Gensler said before he and his fellow SEC commissioners voted 3-2 to pass the rule in Washington.
The final rule could require thousands of companies to report some greenhouse gas emissions in an attempt to provide investors with more consistent, reliable and comparable climate disclosures.
However, the extent of disclosures required will be less ambitious than first floated, possibly in an attempt, experts said, to insulate the rule from legal challenges.
Mere hours after adopting the rule, Patrick Morrisey, West Virginia’s attorney-general, announced he was joining a coalition of 10 states, including Georgia and South Carolina, on Wednesday to challenge the rule in the US Court of Appeals for the 11th circuit.
Although the SEC had modified the rule, it “is still wildly in defect and illegal and unconstitutional”, Morrisey said. He argued the regulator had reached beyond the authority it was granted by Congress. The rule may also violate the first amendment by forcing businesses “to put forth initiatives and disclose information that [they] might not otherwise want to do”, he said.
The SEC did not immediately respond to a request for comment on the lawsuit.
The regulator in March 2022 proposed that public companies’ annual reports include data on their direct emissions and those derived from energy they purchase, respectively known as scope 1 and scope 2 emissions.
The original proposal’s most controversial disclosure involved so-called scope 3 emissions, a broader measurement that includes products a company buys from third parties, business travel and the end use of goods sold by the company. The SEC originally said scope 3 emissions would need to be disclosed only if they were deemed “material” or part of companies’ climate targets.
But the final version of the rule excludes scope 3 emissions. It narrows scope 1 and scope 2 disclosures only to emissions deemed “material” for larger SEC-registered businesses.
The agency said it had received a large number of comments that raised concerns around compliance costs of scope 3 reporting and whether current means of data collection could provide consistent and reliable disclosures.
While all three Democratic SEC commissioners voted in favour of the rule, they also said more needed to be done. Caroline Crenshaw expressed the toughest criticism, arguing it lacked “important” disclosures. “To be crystal clear . . . this is not the rule I would have written,” she said. “While these are important steps forward, they are a bare minimum.”
Gensler said the SEC had made progress, but agreed with Crenshaw that “there’ll be more work to be done”.
The agency’s two Republican commissioners pushed back against the rule, arguing it overstepped the SEC’s authority and would overwhelm investors as well as companies. One of them, Hester Peirce, said the rule would “spam investors with details about the commission’s pet topic of the day: climate”.
Under the final rule, about 40 per cent of the 7,000 US public companies registered with the SEC would be large enough to qualify for mandatory scope 1 and 2 emissions reporting if their emissions were considered material.
Roughly 60 per cent of the 900 foreign private issuers registered with the SEC may also be subject to the new disclosures, if emissions meet the criteria.
Gensler said including climate disclosures in standardised annual reports and SEC registration statements “will help make them more reliable”.
The absence of scope 3 requirements has disappointed some environmental groups that had supported the broadest version of the proposal. But others have said a more limited rule is likelier to survive widely anticipated legal challenges.
Steven Rothstein, managing director at investor group Ceres, said: “We think it’s important for investors to have a good rule that can be implemented and sustained, rather than a great rule that is never implemented.”
The proposal comes as US regulators face opposition from more pro-business judges sitting in higher courts. The Supreme Court in 2022 handed down a landmark ruling against the Environmental Protection Agency that raised questions about the extent of agencies’ rulemaking powers.
Michael Piwowar, a former Republican SEC commissioner who is now with the Milken Institute, on Tuesday said there was “almost a 100 per cent chance that the SEC will be sued by multiple trade associations even if they pull back on scope 3 emissions”.
In a 2022 letter, 24 Republican state attorneys-general urged the SEC to drop the climate rule, saying it would “undoubtedly draw legal challenges” and “not survive this review”.
Republican lawmakers in Congress have accused Gensler of stepping beyond the SEC’s authority and of pursuing a “progressive” agenda. But he has argued that the regulator is merely meeting investor demand for climate risk disclosures. He has also highlighted that in 2021, 55 per cent of companies in the Russell 1,000 already disclosed scope 1 and scope 2 emissions.
Gensler said the rule was “consistent with our mission and congressional mandate” and was “grounded in materiality” stemming from US securities laws and Supreme Court decisions.
The SEC rule would add to the growing global regulatory regime for corporate climate disclosures. International companies are preparing to report climate disclosures as part of Europe’s Corporate Sustainability Reporting Directive. California last year adopted its own requirements for carbon emissions disclosures affecting private and public companies operating in the state.
Separately on Wednesday, all five SEC commissioners voted to approve to a rule that will expand publicly available data from exchanges, wholesalers and larger broker-dealers to include more about trade speed and pricing.
The rule, which is designed to help investors measure overall execution quality, was the first element to reach a vote from a four-part overhaul of the stock market structure first proposed in December 2022.
Additional reporting by Jennifer Hughes in New York
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