SEC adopts reduced climate-related disclosure rule
The same week the first of New Zealand’s mandatory climate-related disclosures were being released, the United States Securities and Exchange Commission (SEC) voted 3-2 to adopt company climate disclosure rules.
Intended to provide investors more transparency into climate risks to support informed investment decisions, the climate disclosure rule, which was adopted on 6 March, requires thousands of companies to disclose Scope 1 and 2 emissions in standardised annual reports and SEC registration statements – if material. The single materiality approach means, if deemed material, entities only having to do scenario analysis and report on the impacts of climate change on the business. Reporting requirements start in 2026 (for FY 2025) with mandatory assurance requirements of GHG emissions being phased in.
The rule has undergone some major scaling back since the original draft proposal was released in March 2022, with Scope 3 emissions removed altogether and Scope 1 and 2 emissions limited to those deemed material for larger SEC-registered businesses. Around 2,800 US public companies and 540 foreign private issuers registered with the SEC may be subject to the new disclosure rule if their Scope 1 and 2 emissions are material. While the scaling back was, in part, to mollify potential legal challenges, a group of 10 US state attorney-generals filed the first, of what is anticipated to be many lawsuits, within two hours of the vote. California, the first state to adopt climate disclosure requirements, was similarly sued, but the legislation currently remains in effect.
Conversely, a number of proponents, including the three Democrat SEC commissioners who voted for the rule, have criticised it for not going far enough. Environmental groups have also expressed their concerns, particularly around the reliance on companies’ materiality assessments. While it is unprecedented, with Scope 3 emissions estimated to account for up to 95 per cent of a companies’ carbon emissions, it is anticipated that the SEC could be sued from both sides.
While this leaves things up in the air for directors, with disclosure frameworks being adopted around the globe and a number of states adopting their own climate disclosure requirements, the pressure on companies to disclose remains. Further, companies that need to comply with California’s climate disclosure laws or the European Union’s Corporate Sustainability Reporting Directive for example, will still need to report on Scope 3 emissions.
Nearly 40 per cent of publicly traded companies already disclose climate-related risks in their annual reports – including 90 per cent of the Russell 1000 companies (the 1,000 largest publicly held companies by total market capitalisation) that voluntarily disclose sustainability/ESG information alongside their annual reports. While the SEC rule would provide a common reporting framework for companies, compliance costs and the impact on competition were key concerns.
