Companies may now need to start disclosing to their shareholders, in general terms at least, how fundamentally incompatible their businesses might be with the environment caused by global warming – just not as precisely as some executives might have expected.
The Securities and Exchange Commission on Wednesday voted to approve new climate risk disclosure rules, a sharp change that will mean many companies must now not only include such information into their required U.S. business risk statements for the public but additionally state how serious is their carbon emissions profile.
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Still, some clima.The te advocates say that the original rules were weakened after they attracted opposition from business leaders. But some suggest they could still be a watershed moment for the financial world to realize how in its costs climate change is.
The new rules, which passed the commission by a 3-2 vote, will force large public companies to declare some facts regarding their greenhouse gas emissions and also will require them to describe how climate change could harm elements of their business. Compared with earlier drafts, the rules now in effect will make exceptions for fewer enterprises and also not require most indirect emissions of carbon to be disclosed.
Many major companies already use such information voluntarily. The new rules could he; Pin! reduce green-washing, set up a standard for disclosure and force large companies into greater openness, said Cynthia Hanawalt, director of climate finance and regulation at Columbia University’s Sabin Center for Climate Change Law.
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The changes are part of a wider trend in the business world towards recognizing climate change. The regulator and business now acknowledge something that used to be considered a question for scientists, or at best a prospect future threat.
“For a long time climate change was seen as a moral and social issue”, said Hanawalt, “but it has been only this past ten years when it has started to become clear how much economic loss and financial danger such simply won’t do.”
Hanawalt added that the rule “is certainly a big step forward in making this information much more standard for investors and lots of transparency around the risks they’re running.”
The new rules were proposed in March 2022. They have become a flashpoint of controversy at the SEC, with 24,000 public comment letters to be sorted through before the agency makes its final decision.
The final version of the rule was considerably weakened from the initial draft. It no longer requires companies to disclose Scope 3 emissions, which describe indirect emissions such as the greenhouse gasses produced to mine raw materials from a supplier or the emissions caused by a product in its end use. Thus an automaker would not have to disclose the carbon cost of the steel it bought from a subcontractor nor would it need to consider emissions that a car might be expected to emit throughout its lifetime of driving.
The final rule also narrows the types of enterprises that must declare their Scope 1 and 2 emissions, which cover greenhouse gasses produced directly by a company and are often linked to energy consumption
According to an SEC fact sheet, only large companies — those with at least $75 million in the hands of public investors — will be required to disclose this information as the new rules are phased in
For some companies, Scope 3 emissions represent as much as 90% of their total emissions output, S&P Global said on Wednesday.
“With it, you’ll lose a whole dimension of risk,” according to Hanawalt. “This is especially true in the case of the fossil fuel industry, but also in sectors such as agriculture and agriculture management or cement manufacturing.”
Hanawalt went on to say that “the rule will establish a new standard for disclosure of climate risk throughout worldwide markets.”
“It will affect some of the biggest companies doing business in the United States and establish parameters for capital markets worldwide,” she added.
Chairman Gary Gensler of the SEC said in an interview with CNBC that the new disclosures would help guarantee that public companies follow climate targets and emission goals.
“From this perspective, I think it has a deterrent role,” Gensler confirmed.
Those wanting more stringent disclosure requirements and opponents of such regulation all present potential legal and political obstacles to the new rules.
In a statement Sen. Tim Scott, R-S.C., criticized the SEC’s regulation as “federal overreach at its worst,” and said he would use the Congressional Review Act to “overturn it.”
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In a statement, the Sierra Club said that it was “looking at what steps to take in response to the SEC’s capricious deletion of key portions.”
Hanawalt said it could be years before legal challenges are finally resolved.
“As with the final rule changes at the SEC, the SEC appears to have taken into account the possibility of legal challenges,” Hanawalt explained. “We will see challenges coming from both directions and they will go to multiple courts. It will be a complicated court process over a few years.”
