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The US securities regulator is poised to enact 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 to be voted on Wednesday will mark 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 as his agency began to discuss the measure at a public meeting in Washington.
The final rule could require thousands of companies to report some greenhouse gas emissions in a bid 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 to insulate the rule from legal challenges, experts said.
The SEC 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 before the commission 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.
Under the final version of the 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 that including climate disclosures in standardised annual reports and SEC registration statements “will help make them more reliable”.
The absence of scope 3 requirements will probably anger 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.
“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,” said Steven Rothstein, managing director at investor group Ceres.
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 1000 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.
Legal claims may also come from climate groups. Andres Restrepo, a senior attorney for the Sierra Club, said on Tuesday that the environmental organisation was considering filing a lawsuit if the final rule only required very limited climate disclosures.
Congress had given the SEC a mandate to protect investors, Restrepo said. “If they come up with something that does not protect investors, then there is potentially a lawsuit. Have they met their obligations under the statute?”
The SEC rule would add to the growing global regulatory regime for corporate climate disclosures. International companies are already 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.
Commissioners on Wednesday were also due to vote separately on a rule that would 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, is the first element to reach a vote from a four-part overhaul of the stock market structure first proposed by the SEC in December 2022.
Additional reporting by Jennifer Hughes in New York
Climate Capital
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