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SEC Proposes Rule That Would Require Public Companies to Disclose Emissions

Ruth Singleton
Published Date:
Mar 21, 2022


On Monday, the Securities and Exchange Commission (SEC) announced a proposed rule that would require all publicly traded companies to disclose their greenhouse gas emissions and attendant risks in the financial statements that they submit to the agency. According to the Washington Post, the proposed rule would be the first SEC rule to require emissions reporting.

SEC Chair Gary Gensler issued a statement, saying, “Today, the Commission is considering a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.”

Under the proposed rule, all publicly traded firms would be required to share the emissions they generate at their own facilities, and larger businesses would need to have these numbers vetted by an independent auditing firm, the SEC said. If the indirect emissions produced by a company’s suppliers and customers are “material” to investors or included in the company’s climate targets, the SEC said those emissions must be disclosed as well.

Specifically, the rule  would “require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements.

Companies that have made public pledges to reduce their carbon footprint would have to detail how they intend to meet their goal and to share any relevant data. They would also need to disclose their reliance on carbon offsets to meet their emissions reduction goals.

While many businesses already include their greenhouse gas emissions in their annual sustainability reports and updates to investors, there are sometimes wide discrepancies in the standards they apply. The proposed SEC rule follows many of the standards set by the Task Force on Climate-Related Financial Disclosures, a group established by former New York mayor Michael Bloomberg in 2015 to advocate for greater disclosure of climate-related risks to investors and insurers.

The public will have 60 days to submit comments on the proposed rule. The agency will  review those comments before issuing a final rule, which will be voted on by the SEC’s four commissioners—three Democrats and one Republican. This process could take several months. In its fact sheet, the SEC said the new requirements would be phased in over several years. The largest companies would need to start disclosing climate risks in fiscal year 2023, while other firms would have until fiscal year 2024. Companies will get an extra year beyond those dates to include supplier and customer emissions, and to get emissions data audited, 

Hester Pierce, the one Republican, issued a statement, saying, “Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures.  The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures.  We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency.  For that reason, I cannot support the proposal.”

The data generated by these disclosures would inform decisions made by investors and portfolio managers. According to the SEC fact sheet, "Investors ...have expressed a need for more consistent, comparable, and reliable information about how a registrant has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan. The proposed rules are intended to enhance and standardize climate-related disclosures to address these investor needs". The new disclosures could reveal which companies lag within their industries in cutting carbon emissions, leaving them more vulnerable to pressure campaigns from investors and the public, the Washington Post reported. 

In his statement, Gensler said, “Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. One report found that nearly two-thirds of companies in the Russell 1000 Index, and 90 percent of the 500 largest companies in that index, published sustainability reports in 2019 using various third-party standards, which include information about climate risks. SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers.

The Post reported that the proposed rule could transform the SEC into one of the nation’s leading enforcers of climate-related disclosures. While environmentalists say that the agency is well-suited for this role, other experts are skeptical about whether it has the necessary expertise on climate issues.

As one might expect, environmentalists hailed the proposed rule as a crucial first step in forcing the private sector to confront the economic risks of a warming world, while some conservatives and business groups have come out against mandating any climate disclosures and may challenge the SEC proposal in court. According to the Post, one possible line of argument for challenging the proposed rule would be that it does not hold up to the “strict scrutiny test,” which says laws and regulations must meet a “compelling government interest” to be constitutional. 

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