The Securities and Exchange Commission (SEC) has recently approved a groundbreaking new rule that mandates publicly traded companies to disclose their direct greenhouse gas emissions. The proposal, which received backing with a close vote of 3 to 2 at a recent SEC meeting, marks a significant step towards enhancing transparency and accountability in corporate climate disclosures.
The newly passed legislation, titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” not only requires US-based companies to disclose details on their direct emissions but also mandates disclosure on their use of carbon offsets, including associated costs if these credits contribute to their emissions reduction targets. Companies are further required to detail how climate change impacts their operations, financial condition, and strategies, as well as explain the risks they face and how they are managing them, including the potential impact on revenue and expenses.
The original SEC proposal initially included requirements for companies to disclose their Scope 1, 2, and 3 emissions. However, Scope 3 emissions, which pertain to indirect emissions from customers and suppliers, sparked controversy and were ultimately excluded in the final rule. Scope 1 emissions refer to those directly emitted by the company, while Scope 2 covers emissions from the fuel and energy purchased by the company. The disclosure of Scope 1 and 2 emissions is mandatory if the company deems the information “material” to investors, providing crucial insights for informed decision-making.
Scope 3 emissions, which were the subject of significant debate due to the challenges associated with calculating indirect emissions, particularly for large companies in the fossil energy sector, were ultimately dropped following an extensive public comment period. The SEC’s decision to exclude Scope 3 emissions came after receiving 4,500 letters and 24,000 comments, highlighting the complexity and contentious nature of this aspect of climate disclosure.
For the past two years, the SEC has been deliberating on establishing standardized requirements for corporate climate disclosure to promote transparency in boardrooms. The newly approved rule not only mandates disclosure of emissions but also requires companies to provide a detailed breakdown of the costs associated with carbon credits, influencing future purchases of these offsets.
One of the key provisions of the SEC’s new rule is the requirement for “accelerated filers,” companies with publicly traded shares valued at $75 million or more, to disclose their Scope 1 and 2 emissions. Additionally, the rule mandates the disclosure of costs related to severe weather events and other natural disasters on financial statements, as well as the disclosure of the material impacts of climate-related risks on companies’ strategy, business model, and outlook.
The SEC’s final rule focuses specifically on disclosing expenditures related to carbon offsets and renewable energy credits (RECs), rather than general energy transition activities, as confirmed by SEC officials. The rule aims to enhance transparency and comparability in climate disclosures, with an estimated 2,800 companies required to report on their climate-related financial risks, representing 40% of US public companies registered with the SEC.
Mixed reactions have emerged following the announcement of the SEC’s climate disclosure rule. Former SEC commissioner Allison Herren Lee expressed concern that the rule may not effectively prevent companies from making vague or unsubstantiated statements about their carbon footprints. However, supporters of the rule view it as a significant milestone towards enhancing disclosure rules on climate risks for investors and issuers.
The SEC’s new rule adds to the evolving global regulatory landscape for corporate climate disclosures, aligning with similar initiatives in Europe and California. As companies prepare to comply with these regulations, the importance of climate-related transparency in corporate reporting continues to grow, reflecting a broader shift towards sustainable and responsible business practices.
