The SEC voted to mandate climate disclosures, but the rules are weaker than it initially proposed.
The US Securities and Exchange Commission (SEC) adopted new rules that compel large companies to disclose their greenhouse gas emissions and tell investors how their business is affected by climate change.
The new rules are weaker than what the SEC initially proposed in March 2022, which would have included a fuller picture of a company’s carbon footprint. Initially, it wanted each company to share pollution stemming from its operations, as well as emissions from its supply chain and the use of its products. Under the rules finalized today, companies won’t have to measure and disclose pollution from their supply chain and products — even though those emissions are often the biggest chunk of a company’s carbon footprint.
As a result, environmental advocates and trade groups that pushed back against the SECs initial proposal are all notching a partial victory. The new rules create a lot more transparency than there’s ever been on a company’s environmental impact. Climate advocates, meanwhile, say the rule can still be strengthened.
“From the SEC’s perspective, [the rule] will ensure more consistent information for investors, and that is good for the capital markets … investors have been asking for it because they understand that climate risk is financial risk, and you can’t manage the problem if you first can’t measure the problem,” says Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets.
The rule also mandates that large companies registered with the SEC share impacts and risks they face from climate change. But the biggest tussles over this rule have been over how transparent companies need to be about their greenhouse gas pollution.
A company’s carbon footprint — how much planet-heating pollution it produces — is measured in three ‘scopes.’ The scope that includes indirect supply chain and consumer emissions — Scope 3 — has been hotly contested since the SEC first proposed a climate disclosure rule in 2022.
“We do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control,” BlackRock said in a June 2022 statement.
“This tracking [of Scope 3 emissions] will be extremely expensive, invasive, and burdensome for farmers and ranchers,” agricultural groups including soybean, corn, beef, and pork producers wrote in their comments to the SEC.
After facing swift backlash from industry groups, particularly in agriculture and banking, and garnering some 24,000 comments from the public, the SEC blew past its initial 2023 deadline to finalize the rule and eventually watered it down. “While many, many investors commented on this, and many investors today are using Scope 3 information in their investment decision making, based upon the public feedback, we’re not requiring scope three emissions disclosures at this time,” SEC Chair Gary Gensler said in an open meeting today.
More broadly, Republicans have led a charge against ESG investing, or investing that takes environmental, social, and governance factors into account. And the US faces the potential return of former president Donald Trump, who rolled back more than 125 environmental regulations during his first term — so the fate of rules on the book now could all depend on the outcome of elections this year.
Under the rules put in place today, large public companies will still have to report direct emissions from their operations and energy use that are “material” or essential for investors’ understanding of a company’s financial situation. Those disclosures would begin for fiscal year 2026. “If the SEC does not include scope three, then [the rule] will be incomplete. But we still think it’ll be a step forward,” Rothstein said in an interview with The Verge before the rules were finalized.
Companies doing businesses in California might still wind up having to share their Scope 3 emissions after the state passed a more wide-sweeping bill last year. Companies with annual revenues over $1 billion would have to publicly report greenhouse gas emissions that come from their operations and electricity use by 2026 and disclose Scope 3 emissions by the following year. The California Chamber of Commerce, American Farm Bureau Federation, and other business groups have already sued to stop its implementation. And similar legal challenges are expected with the SEC’s new rule.
Other companies, however, have been more supportive of disclosures. “While these emissions can be challenging to measure, they are essential to understanding the full range of a company’s climate impacts,” Apple director for state and local government affairs Michael Foulkes wrote in a letter before California passed its climate disclosure rule. Already, more than 80 percent of the 1,000 largest listed companies in the US share climate-related information in their ESG reports.
