SEC Set To Overhaul Climate Change Disclosure Rules For U.S.-Listed Companies

(CTN News) – In a groundbreaking move, the U.S. Securities and Exchange Commission (SEC) is poised to vote on far-reaching changes that would revolutionize the way U.S.-listed companies communicate climate change impacts to investors.

This potential landmark rule underscores the growing recognition of the materiality of climate-related information in investment decisions.

Reporting Emissions: Scope 1, Scope 2, and the Omission of Scope 3

The draft rule proposed by the SEC two years ago initially suggested companies report greenhouse gas emissions in three categories.

These included Scope 1, covering emissions from a company’s own operations, and Scope 2, comprising emissions associated with utilities use and power generation.

However, the most contentious element was Scope 3 emissions, which encompass emissions from a company’s supply chain, such as transportation of goods, business travel, and customer consumption of products and services.

Major lobby groups vehemently opposed the inclusion of Scope 3, arguing it was excessively burdensome and unlikely to yield meaningful data. In response, SEC officials have removed Scope 3 from the proposed regulation.

Additionally, the disclosure requirements for Scopes 1 and 2 have been softened; they are now mandatory only if companies consider them material, providing businesses with greater flexibility in reporting.

SEC Climate Financial Impacts: Navigating the Controversy

The original draft also required companies to disclose in their financial statements any impact exceeding 1% from climate-related events, such as damage from severe weather or expenses associated with decarbonization efforts.

This provision faced considerable criticism from industry players, who argued that proper accounting methods for such impacts were nonexistent and that the resulting data would lack meaningfulness.

While industry critics contend that these provisions are unworkable, progressive and financial reform groups assert that such disclosures are not only practicable but also essential for informed decision-making.

Striking the right balance between transparency and practicality remains a central challenge for the SEC in finalizing these rules.

Disclosing Risk: A Holistic Approach

The proposed changes extend beyond emissions reporting and financial impacts. The SEC’s proposal mandates companies to disclose a spectrum of risk-related information.

This includes insights into how boards of directors manage climate risk, potential impacts on business operations, business models, corporate strategies, and overall business outlooks.

Moreover, if companies have low-carbon transition plans or utilize scenarios to analyze climate-related risks, they would be required to provide detailed descriptions to investors.

This shift towards a more holistic disclosure framework aims to give investors a comprehensive understanding of how climate-related risks are integrated into a company’s governance and strategic decision-making processes.

As the SEC inches closer to the vote, the debate between industry stakeholders and advocates for robust climate disclosure continues.

Striking a balance between providing meaningful information to investors and addressing concerns about the practicality and burden on businesses will be crucial for the SEC in finalizing regulations that could reshape corporate disclosure practices for years to come.