SEC passes climate rule that leaves no one happy

Scope 3 emissions excluded, commissioner says steps forward are 'bare minimum.'

Many large public companies will eventually have to report climate-related risks under a final rule passed by the SEC today – but the requirements are significantly more limited than what the agency initially proposed and what climate groups wanted.

Namely, the final version of the agency’s rule does not include disclosures related to the wide-ranging “Scope 3” greenhouse gas emissions. That category, which covers carbon in the supply chain and among end users, represents the bulk of greenhouse gases for companies like retailers. Sustainable investors and environmental groups had lobbied the Securities and Exchange Commission to include Scope 3, but the agency noted that feedback from companies about the likely costs and complexity made it pull back from the proposed requirement.

The SEC also made various requirements of the final rule less prescriptive than the proposal’s and gave a longer phase-in time for companies to make disclosures. But the concessions did not satisfy the conservative members of the commission, as commissioners Hester Peirce and Mark Uyeda voted against it. And the liberal commissioners said leading up to their votes that the final version left much to be desired.

“This is not the rule I would have written. While these are important steps forward, they are the bare minimum. Ultimately today’s rule is better for investors than no rule at all, and that is why it has my vote,” commissioner Caroline Crenshaw said. “But, while it has my vote, it does not have my unencumbered support. And, although I am loath to leave for future commissions those obligations that I see as our responsibilities today, I’m afraid that is precisely what we are doing.”

Crenshaw, Chair Gary Gensler, and commissioner Jaime Lizárraga voted in favor of the rule.

The rule will require major public companies to disclose climate-related risks, including Scope 1 and 2 emissions, which pertain to the greenhouse gases the businesses directly emit, as well as those related to the energy they consume. However, such disclosures are only required by companies that determine on their own that the data are materially financial in nature or if they have set targets or goals around emissions reduction. They will also have to disclose the material risks they face around severe weather events, like floods and hurricanes.

Further, the disclosures for many public companies will subject to third-party review, or so-called “attestation” by independent auditors. That, SEC staff said, will help ensure that the data and methods used to present the data are consistent and comparable for investors.

The need for such disclosures is evident because most public companies, including an estimated 90 percent of those in the Russell 1000 Index, already provide some type of climate reporting in documents not governed by the agency, SEC Chair Gary Gensler said. And about 60 percent of companies already disclose their greenhouse gas emissions in a variety of formats and with differing methodologies that makes comparison difficult, he said.

Leading up to the SEC hearing, there were about 24,000 public comments submitted on the proposed rule, showing the ferocity of the debate around it.

“I have observed a tendency in these discussions to let the dialog steer away from the true purpose of our proposal,” Crenshaw said. “We proposed this rule to benefit investors who, at the end of the day, are people. That includes people who have put in a lifetime’s worth of labor, and who invest their savings with the promise of a better future for themselves and their families.”

Investors have asked for requirements for the companies whose shares they own to make disclosures in standardized ways that help evaluate the material financial risks they face around climate issues, supporters said.

Uyeda said the rule amounted to the SEC going beyond its Congressional mandate to become a climate regulator, pointing to the 886-page document as being political and socially motivated.

Peirce voiced numerous objections to the rule, stating that guidance the SEC issued in 2010 on climate-related disclosures was sufficient. More than a third of public filers already include some types of climate disclosures in their annual reports or other forms, she said.

The rule will burden some companies with having to determine whether they face climate-related risks, potentially hiring up and establishing new systems to see if they even need to make disclosures, Peirce said. Moreover, the additional disclosures will “spam” investors with information they don’t want or need, she said.

“The rule embraces materiality in name only,” she said.