SEC releases highly anticipated climate-related disclosure rule

The proposed rule would order public companies to include disclosures about how climate-related risks affect their strategy, business model, and outlook; how the company’s board and management oversee climate-related issues; and any plans for transition to a lower carbon footprint.

The crux of the disclosure would lay out climate-related risks to the company’s operations, assets, and finances posed by natural disasters like wildfires, floods, sea change, hurricanes, and more and transitional risks posed by changes in regulatory policies or consumer demand affected by climate change.

The rule, which was expected to be released last year, represents the Biden administration’s attempt to promote its environmental agenda through regulatory action as opposed to with legislation, where President Joe Biden’s climate initiatives have made little progress in Congress.

Under the rule, companies would also be required to assess, track, and measure the amount of greenhouse gas (GHG) emissions produced by their business (Scope 1 emissions) as well as those produced by their purchase of electricity and other forms of energy (Scope 2). Large companies would also have to disclose indirect GHG emissions from their supply chain (Scope 3) if the company either deemed those emissions material to their business or included them in a GHG emissions reduction target or goal.

Compliance deadlines for reporting Scope 3 emissions would be staggered after deadlines for Scope 1 and Scope 2, the SEC said, with smaller reporting companies being exempted. The proposal would also provide a safe harbor for liability from Scope 3 emissions disclosures made in good faith.

Large companies would be required to “obtain an attestation report from an independent attestation service provider” to confirm the company’s assessment of its Scope 1 and 2 emissions.

The rule was described in a statement by Commissioner Allison Herren Lee as “a watershed moment for investors and financial markets,” while Commissioner Hester Peirce stated the proposal would be “facilitating the growth of the climate-industrial complex and fostering unfair, disorderly, and inefficient markets.”

The proposed rule was passed by the SEC with a 3-1 vote led by Chair Gary Gensler, who was joined by Lee and fellow Democrat Caroline Crenshaw. Peirce, a Republican, voted no. The SEC will accept public comments on the proposal for at least 60 days.

The agency said in an accompanying fact sheet that should the final rule be approved this year as expected, large accelerated filers would be expected to comply with most of the rule’s provisions in fiscal year 2023.

“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions,” said Gensler in a statement. “… Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.”

Gensler added the proposal draws from the Task Force on Climate-Related Financial Disclosures (TCFD), an international framework adopted by Brazil, the European Union, Hong Kong, Japan, the United Kingdom, and more.

Republican pushback against the proposed rule was fierce.

“Today’s action hijacks the democratic process and disrespects the limited scope of authority that Congress gave to the SEC,” said Sen. Pat Toomey (R-Pa.) in a statement. “This is a thinly veiled effort to have unelected financial regulators set climate and energy policy for America. Forcing publicly traded companies to gather and report global warming data—almost none of which is material to the business’s finances—extends far beyond the SEC’s mission and expertise.”

Peirce, in her dissenting statement, laid out her case the disclosures would not provide investors with the clarity they seek on climate-related risk because linking a firm’s financial outlook to either physical or transitional risks posed by climate change is exceedingly difficult.

“Wanting to bring clarity in an area where there has been a lot of confusion and greenwashing is understandable, but the release mistakenly assumes that quantification can generate clarity even when the required data are, in large part, highly unreliable,” she wrote. “Requiring companies to put these faulty quantitative analyses in an official filing will further enhance their apparent reliability while in fact leaving investors worse off, as Commission-mandated disclosures will lull them into thinking that they understand companies’ emissions better than they actually do.”

The SEC in its proposal estimated the rule will cost large companies $640,000 in the first year and $530,000 per year in subsequent years, while smaller companies would pay $490,000 in the first year and $420,000 in subsequent years. The money would be spent on internal costs connected to collecting, assessing, measuring, and disclosing climate-related data, as well as “outside professional costs.”

The SEC said its own assessment of public company disclosures in 2019 and 2020 showed about one-third of companies already included at least some of the climate-related disclosures mandated by the new rule.

Independent sustainability research firm Verdantix estimated the proposed rule could result in $6.7 billion of total spending by public companies on consulting, legal, assurance, and digital solutions over three years, starting in 2023.

The U.S. Chamber of Commerce was tempered in its response to the proposed rule.

“The Chamber is concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors,” said Tom Quaadman, executive vice president for the Chamber’s Center for Capital Markets Competitiveness, in a statement. “The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad.”