The recent decision by the Securities and Exchange Commission (SEC) mandates that publicly traded companies must disclose their direct greenhouse gas emissions if the information is considered significant to investors. While there was anticipation for the inclusion of indirect emissions in the disclosure requirements, the final rule only focuses on direct emissions.
Moreover, all U.S. companies are now obligated to report on how climate change could have adverse effects on their financial status, such as those resulting from floods, storms, or droughts. The SEC defines “material” information as data that would be crucial for investors to know before making investment decisions.
Initially, the SEC’s proposal included the disclosure of a company’s Scope 1, 2, and 3 emissions. Scope 1 pertains to the greenhouse gasses emitted directly by a company, Scope 2 covers emissions from the fuel and energy the company acquires, and Scope 3 involves emissions produced by customers or suppliers.
Scope 3 emissions proved to be the most contentious as they are challenging to calculate and impose a significant compliance burden on companies. Following a lengthy period of public comments, with over 4,500 letters and 24,000 comments received, the SEC decided to eliminate the requirement for Scope 3 emissions disclosure.
The official rule released by the SEC is quite comprehensive, spanning over 800 pages. Three key requirements stand out immediately: “accelerated filers”, which are companies with publicly traded shares valued at $75 million or more, must disclose Scope 1 and 2 emissions; costs associated with severe weather events must be disclosed on financial statements; and companies must reveal the material impacts of climate-related risks on their strategy, business model, and outlook.
Despite these new regulations, concerns have been raised about the potential for companies to selectively disclose information without providing a full picture of their climate impact. Former SEC commissioner Allison Herren Lee expressed disappointment in the new rule, stating that it may enable greenwashing and lead to mispricing risks and misallocation of capital in the capital markets.
The SEC estimates that approximately 2,800 U.S. companies will be required to report on climate-related financial risks. Accelerated filers will need to start reporting Scope 1 and 2 emissions by 2026.
Notably, ten Republican-led states have initiated legal action to challenge the new SEC rules, arguing that the requirements go beyond standard financial reporting and could overwhelm companies with excessive data collection. The exclusion of the Scope 3 requirement in the final rule may bolster its chances of surviving legal challenges.