In a 3-2 vote, the Securities and Exchange Commission (SEC) finalized its much-awaited climate disclosure rule. The SEC was overwhelmed with comment letters from companies and investors alike warning that the proposed rules were not feasible, especially regarding the requirement to disclose emissions from suppliers, known as Scope 3.
- The decision, with SEC Chair Gary Gensler and his Democratic colleagues in favor, mandates many of the nation's largest companies disclose their greenhouse gas emissions.
- Under the approved regulation, large publicly traded companies will be required to disclose both direct (Scope 1) and indirect (Scope 2) emissions, provided they are deemed material.
- However, the SEC stopped short of mandating the reporting of emissions from suppliers (Scope 3), which was part of the original proposal. SEC also removed all reporting requirements for small companies.
- Additionally, companies are required to reveal climate-related risks to investors, such as the financial impacts of severe weather events like flooding and wildfires.
The implementation of these regulations will be phased in for large and midsize companies, with the largest filers expected to begin reporting in 2025 and full compliance by 2033. Chair Gensler emphasized that these rules are a response to growing investor demand for information regarding companies' exposure to climate change, noting that some companies are voluntarily disclosing such information.
What they're saying: The SEC's decision faced opposition from its two Republican commissioners. Commissioner Mark Uyeda criticized the rule, alleging that it was “climate regulation in disguise,” while Commissioner Hester Peirce said the SEC lacked the authority to enact the rule and would be “spamming” investors with information.
Next steps: The compliance phase-in for large and midsize companies is a welcome change from the original proposal and from previous rules, such as the Dodd-Frank Pay Versus Performance rule, which required lightning-fast compliance despite a short comment period. Stay tuned for forthcoming rules on human capital metrics and board diversity now that the decks have been cleared.
