SEC approves disclosure rule for climate-related risks. Here’s what’s next for companies and investors
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U.S. Securities and Exchange Commission Chair Gary Gensler testifies before a House Financial Services Committee oversight hearing on Capitol Hill in Washington, D.C., on Sept. 27, 2023.
Jonathan Ernst | Reuters
The U.S. Securities and Exchange Commission on Wednesday voted to adopt new rules that will require most publicly traded companies to disclose climate-related risks in their registration statements and annual reports.
In particular, companies will have to share details on climate-related risks that could have a material effect on their business strategy or financial condition, as well as how they affect their outlook and business model.
The rule proposal was first made in March 2022, but the SEC extended the public comment period several times.
“The SEC has no role as to climate risk itself, but we do have a role with regard to disclosures,” SEC Chair Gary Gensler said in his introductory remarks, addressing criticism from Republicans and some in the business community that the SEC is overreaching and should not be engaged in the climate change debate.
He noted the SEC has continuously updated its disclosure requirements over the years, including those related to environmental risks.
SEC staff members have noted that nearly 40% of publicly traded companies already disclose information about climate-related risk in their annual reports, but there is no common reporting framework.
Republican SEC Commissioner Hester Peirce voted against the proposal, saying the benefits do not outweigh the costs.
“This rule will increase the typical external costs of being a public company by around 21%,” she said.
The final rules would require companies to disclose the following:
- “Material” climate-related risks, as well as any activities to mitigate or adapt to those risks.
- The costs of severe weather events and other natural conditions, and the effect of those events on their business conditions.
- Any climate-related targets or goals that are material to their business.
- Processes the company has for identifying and managing material climate-related risk.
- Information about the board of directors’ oversight of climate-related risks.
A rule that has evolved over time
When the initial proposal was made in 2022, it would have required additional disclosure in three categories. There was Scope 1, which referred to direct emissions the company produces through its sources. Scope 2 addressed indirect emissions, such as from generation of energy. Finally, Scope 3 covered emissions from companies’ supply chains and users of their products.
The final proposal dropped the Scope 3 disclosure requirement, due to pushback from corporations claiming the additional reporting requirements were too burdensome.
“The final rules are a continuation of the Commission’s efforts to respond to investor need for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business, as well as information about how the registrant manages those risks,” the SEC said in a statement released with the new rules.
The disclosure requirements for Scope 1 and 2 will be done on a phased-in basis. The rules will become effective 60 days after publication in the Federal Register.
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