SEC takes up landmark rule that would require companies to disclose emissions, climate risks

The U.S. Securities and Exchange Commission is expected to vote Wednesday on a landmark rule requiring companies to report information on their greenhouse gas emissions and climate risks.

The final rule would affect publicly traded companies with business in the U.S. ranging from retail and tech giants to oil and gas majors, and has drawn intense interest in the two years since it was first proposed, with more than 16,000 comments from companies and others.

A draft of the rule would require companies to say much more in their financial statements about the risks that climate change poses to their operations and about their own contributions to the problem. That includes the expected costs of moving away from fossil fuels, as well as risks related to the physical impact of storms, drought and higher temperatures intensified by global warming. Many companies already report such information, and the SEC's rule would standardize such disclosures, the agency says.

“You can’t manage a problem if you can’t measure a problem and this will be an important step in that direction,” said Steven Rothstein, managing director of Ceres, a nonprofit that works with investors and companies to address environmental challenges.

SEC commissioners take up the rule amid published reports that the draft rule has been weakened to drop a requirement for companies to report indirect emissions known as Scope 3. Those are emissions that don't come from a company or its operations, but are generated up and down a supply chain — for example, in producing the fabrics to make a retailer's clothing — or that result when a consumer uses a product, such as gasoline.

The SEC declined to comment on those reports ahead of Wednesday's meeting. SEC Chairman Gary Gensler acknowledged to lawmakers in Washington last year that debate over Scope 3 emissions was delaying the final rule.

“There was an immense amount of feedback on Scope 3,” said Asaf Bernstein, a professor of finance at the University of Colorado, Boulder, who served as an academic advisor to the SEC on the climate disclosure rule. Bernstein said he didn't know whether the final rule up for a vote Wednesday included Scope 3.

Companies, business groups and others had fiercely opposed requiring Scope 3 emissions in the rule. They said quantifying such emissions would be difficult, especially in getting information from international suppliers or private companies. But environmental groups and others in favor of more disclosure argued that Scope 3 emissions are usually the largest part of any company’s carbon footprint and that many companies are already tracking such information.

“What we are seeing in real time is that it’s becoming easier for companies to report their emissions and to get reported emissions from companies in their supply chain,” said Kristina Wyatt, chief sustainability officer for Persefoni, a carbon-accounting software company and a former senior counsel for the SEC on climate and environmental issues.

Scope 1 emissions refer to a company’s direct emissions, and Scope 2 are indirect emissions that come from the production of energy a company acquires to use in its operations.

The SEC's final rule is all but guaranteed to face legal challenges. Some Republicans and some industry groups accused Gensler, a Democrat, of overreach. Their criticism has largely centered on whether the SEC went beyond its mandate to protect the financial integrity of security exchanges and investors from fraud.

Gensler has said an SEC rule was important for consistency and comparability of what companies have to disclose about their emissions.

Three of the SEC's five commissioners, including Gensler, were appointed by President Joe Biden. Two were appointed by then-President Donald Trump.

The SEC rule comes after California passed a similar measure last October that requires both public and private companies operating in the state with more than $1 billion in revenue to report their direct and indirect emissions, including Scope 3. More than 5,300 companies will be required to report their emissions under the California rule, according to Ceres. The European Union also adopted sweeping disclosure rules that will soon take effect.

Those requirements will compel companies to report significant climate-related information no matter what the SEC rule includes, Wyatt said.

“In some sense, the rest of the world has moved ahead and maybe taken some of the significance out of what the SEC does,” Wyatt said.

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