Stockholm (NordSIP) – US financial markets regulator the Securities and Exchange Commission (SEC) has adopted new formal rules governing climate-related disclosures by public companies and in public offerings as of 6 March 2024. These are intended to provide investors with reliable, comparable, and consistent information on the climate-related risks within investee companies’ operations, and how these risks are being managed and mitigated. Commenting on the new disclosure rules, SEC Chair Gary Gensler said: “They will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, which will help make them more reliable.”
Limited coverage and persistent data gaps
Although the greater transparency afforded by the newly introduced disclosure rules has been broadly welcomed, significant climate greenhouse gas (GHG) data blind spots will persist. The rules call for companies categorised as Large Accelerated Filers (LAFs) and Accelerated Filers (AFs) that are not otherwise exempted, to disclose information about material Scope 1 and/or Scope 2 emissions. This will typically exclude companies with a public float of less than $700 million. Those LAFs that will report GHG emissions data will be able to disregard Scope 3 emissions, which in many sectors account of the majority of corporate emissions.
Nevertheless, despite the limitations any improvement in Scope 1 and 2 data provision will be a positive step, given the fact that US listed companies lag well behind their overseas counterparts in that respect. According to MSCI only 45% of US firms report on their Scope 1 and 2 emissions, compared with 73% of non-US companies currently doing so. Just 29% of US listed firms offer partial reporting of Scope 3 emissions. Commenting on the launch of the SEC’s new rules Danielle Fugere, President and Chief Counsel of US-based non-profit foundation As You Sow said: “The old business maxim – what gets measured gets managed – is as relevant today as ever. The corollary, of course, is that risk that doesn’t get measured doesn’t get managed. Disregarding Scope 3 emissions creates a significant hole in shareholders’ understanding of climate risk. Decision making will be impaired by this critical omission.”
Critics of the final version of the SEC climate-related disclosure rules believe that in diluting the requirements the regulator has bowed to pressure from industry lobby groups and Republican state officials. Initial drafts of the regulation stipulated emissions disclosure for all listed companies rather than the limitation to LAFs. Companies will also have the freedom to self-determine whether emissions from their value chains are material and therefore liable for disclosure. Nevertheless, the data that does get disclosed will have to be externally verified and comply with international standards such as those of the Task Force on Climate-related Financial Disclosures (TCFD). It remains that the potentially large data gaps will leave too much scope for corporate climate greenwashing or obfuscation.
Potential legal challenges
The new SEC disclosure requirements also stipulate that companies must report on climate-related physical and transition risks, along with relevant targets, use of scenario analysis, and transition plans. Expenditures relating to severe weather events and other effects of climate change must be itemised in financial statements. However, the ability of companies to determine the materiality of climate-related risks may lead to data gaps. There are also concerns that the SEC rules may become another target of recent legal attempts to circumvent California’s stringent climate reporting legislation by invoking the US constitution’s First Amendment. The US Chamber of Commerce and other industry associations have claimed that California’s rules violate constitutional rights by obliging companies to engage in what they allege is the non-factual, controversial, political matter of climate change.
