The Securities and Exchange Commission (SEC) voted to enforce a new legislation requiring publicly traded businesses to disclose their direct greenhouse gas emissions if the companies consider the information to be “material” to investors.
According to the SEC, “material” is information investors should know before buying shares. It was initially expected that the SEC would start requiring that companies also report on their indirect emissions. However, the agency dropped this requirement from the final rule.
Not to mention, all US enterprises must disclose concerning how the environmental crisis could negatively impact their financial condition. This is in respect of weather-related events like droughts, storms, and floods.
What is included in the new emissions rule?
The original SEC proposal mandated the disclosure of a company’s Scope 1, 2, and 3 emissions. Scope 1 emissions refer to greenhouse gases emitted by a business. Scope 2 then covers emissions from energy and fuel business purchases.
Scope 3 emissions refer to emissions produced by suppliers or customers. These are the most controversial because indirect emissions are the most challenging for businesses to calculate.
Additionally, they impose the highest compliance cost on businesses trying to count them. Following a considerable public comment period, which included 24,000 comments and 4,500 letters, the Scope 3 requirement was dropped.
The official rule is over 800 pages and incredibly detailed. Every business will have to comprehend it in its entirety, but three new rules in particular stand out. These include:
- The costs incurred as a result of severe weather events and other natural disasters have to be disclosed on financial statements.
- Potential and actual material effects of climate-related risks on an organisation’s strategy, outlook and business model have to be disclosed.
- Companies with publicly traded shares worth $75 million or more, defined by the SEC as ‘Accelerated Filers’, must disclose Scope 1 and 2 emissions.
What was the reaction to the new emissions rule?
The SEC currently calculates that roughly 2,800 US companies will have to start reporting climate-related financial risks. Businesses within the accelerated filers category must begin reporting Scope 1 and 2 emissions in 2026. Reuters reported that ten Republican-led states have already sued to prevent the implementation of the new legislation. They have argued that by enforcing regulations that might be too onerous for firms, the SEC is going too far.
The concern is that businesses will be overwhelmed with data-gathering that goes further than the financial numbers investors typically rely on. It has been argued that by vomiting the Scope 3 requirement, the less strict version of the rule could more likely withstand legal hurdles. The SEC has spoken out to state that businesses are set to continue to face a significant amount of investor pressure and that these risks are not going to go away by themselves.
Conclusion
Companies are being advised to prepare to comply with these new rules, which means they need to read up on the new emissions rule and get familiar with what will be required from them. The new emissions rule represents a significant move towards enhancing and standardising climate-related disclosures for investors.
It will ensure investors are provided with comparable, consistent, and decision-useful information with transparent reporting requirements. However, it is difficult to say whether this will be a positive move in terms of climate impact as some experts are concerned that companies will be able to leave reporting up to their discretion, and ultimately, this could result in greenwashing.
