New Rule Requiring Companies to Disclose How Much They Pollute is Coming in 2024
As 2024 approaches, a significant development looms for public companies as the Securities and Exchange Commission (SEC) gears up to decide on a rule requiring them to disclose their greenhouse gas emissions and potential climate change impacts on their businesses.
The rule, anticipated by next spring, aligns with the Biden administration’s climate change initiatives but has faced criticism from business leaders and lawmakers who argue it exceeds the SEC’s mandate to protect investors and regulate markets.
In a letter earlier this year, a group of Republican lawmakers emphasized that the SEC’s primary mission is investor protection, maintaining fair markets, and facilitating capital formation rather than advancing progressive climate policies.
Advocates contend that in an era of increasing climate-related regulations, investors deserve comprehensive information about the financial risks companies may face due to climate change and emissions restrictions before making investment decisions.
The SEC initially proposed the climate disclosure rule in March 2022, but the release of a final version has been delayed multiple times. The proposed rule requires companies to disclose information on two forms of climate change risk: physical and transition risks.
Physical risks encompass climate change’s impact on a company’s operations, including the potential hazards of increased natural disasters. Transition risks relate to potential profit damage resulting from an expanding array of climate change regulations. The rule mandates companies to disclose their pollution generation, categorized into three scopes: scope 1, 2, and 3.
Scope 1 and 2 cover direct and indirect greenhouse gas emissions produced during a company’s operations, while scope 3 refers to emissions indirectly linked to a company, such as those resulting from the use of its products. The rule aims to provide investors with a clearer picture of a company’s environmental impact.
Despite the challenges posed by measuring scope 3 emissions, SEC Chair Gary Gensler emphasized their significance in understanding a company’s transition risk, reflecting investors’ interests.
While the SEC’s rule remains pending, other jurisdictions have taken steps to address pollution disclosures. California Governor Gavin Newsom signed a climate disclosure bill in October, requiring companies doing business in California to disclose emissions from 2026. Europe has also implemented its Corporate Sustainability Reporting Directive, effective since January 2023, compelling certain companies doing business in Europe to publish environmental and social information.
The SEC’s proposed rule has sparked vigorous debates, with critics arguing it could have unintended consequences on the economy. Some contend that the cost of measuring emissions may surpass the SEC’s estimates, leading to potential cost increases for customers or reduced employee compensation. Republican lawmakers have expressed concerns about the rule harming consumers, workers, and the U.S. economy.
In contrast, Democratic officials, including Senator Elizabeth Warren and Representative Jamie Raskin, have voiced strong support for the rule, urging the SEC to fulfill its duty to investors and finalize a robust climate disclosure rule without delay.
SEC Chair Gensler addressed criticisms, emphasizing that while the SEC is not a climate regulator, the rule provides a standardized way for investors to analyze companies’ climate disclosures. Advocates believe the rule will bring consistency to environmental promises and disclosures, preventing companies from having undue influence over their reporting.
