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SEC proposes rule for emissions reporting by companies

Proposal would standardize requirements, but opponents see regulatory overreach

The commission's only Republican, Hester Peirce, seen here at a 2019 congressional hearing, voted against the proposal.
The commission's only Republican, Hester Peirce, seen here at a 2019 congressional hearing, voted against the proposal. (Tom Williams/CQ Roll Call file photo)

Companies should report their greenhouse gas emissions, the impact of climate risk on financial statements and other metrics to the Securities and Exchange Commission, the agency said Monday.

In a 3-1 vote, the SEC proposed rules that would address a lack of standardization among company reporting on climate risk, making it easier for an apples-to-apples comparison on key metrics and provide the most significant update on climate-related financial risk since the SEC’s 2010 guidance.

“I believe the SEC has a role to play when there is this level of demand for consistent, comparable information that may affect financial performance,” Chairman Gary Gensler said during the meeting. “Today’s proposal thus is driven by the needs of both investors on one side and issuers on the other.”

Commissioner Hester Peirce, the agency’s lone Republican member, voted against the measure.

If finalized, public companies would have to report on their Scope 1 and Scope 2 greenhouse gas emissions, which address direct emissions and indirect emissions from purchased electricity and other forms of energy. Larger issuers would be subjected to an assurance requirement on the reliability of the information.

Registrants would only have to report Scope 3 emissions — indirect emissions from supply chains — if they are material or if companies have set reduction goals that include Scope 3. The proposal contains a broad safe harbor for liability for Scope 3 emissions disclosure and exemption for smaller issuers on Scope 3 emissions.

Companies would have a grace period for phasing in their climate disclosure reporting that would vary based on the filer status and whether they are reporting Scope 3 emissions. If the rule is finalized by the end of the year, a large issuer would need to comply for its fiscal year 2023 and file with the SEC in 2024.

The information would need to be disclosed in registration statements and annual reports, including Form 10-K filings, in a standalone section.

Companies would also have to disclose the oversight and governance of climate-related risks by their board of directors and management, and how climate risks have had or will have a material impact on business and financial statements overtime. If the registrant already uses additional tools to address climate risk, such as a transition plan, scenario analysis or internal carbon price, companies would need to provide additional details on how these measures are used.

Task force

The proposal is based on the voluntary disclosure frameworks from the Task Force on Climate-related Financial Disclosures and the GHG Protocol that hundreds of U.S. public companies have adopted. Elliot Staffin, special counsel in the SEC’s Division of Corporate Finance, said this was intentional to help reduce compliance costs for issuers. 

The proposal comes as investors of all sizes — from mainstream asset managers such as BlackRock Inc. and The Vanguard Group Inc. to smaller firms focused on environmental, social and governance investing — are increasingly seeking more information on how companies across industries are addressing vulnerabilities to climate change. 

Investors, Democrats and other ESG proponents argue that companies’ plans to combat climate risk, such as emission reductions, are material to their bottom line and standardization of metrics is long overdue.

“Investors need to know exactly how exposed individual companies are to climate risks. For that, they need consistent, comparable, and detailed data,” Sen. Brian Schatz, D-Hawaii, said in a statement. “This rule will give investors mandatory, standardized disclosures that they can compare across different companies.”

Republicans, meanwhile, contend the SEC’s work on climate disclosure and similar rulemaking oversteps its authority on securities regulation.

“Today’s action hijacks the democratic process and disrespects the limited scope of authority that Congress gave to the SEC,” Sen. Patrick J. Toomey, R-Pa., said in a tweet. “This is a thinly-veiled effort to have unelected financial regulators set climate and energy policy for America.”

The SEC will have a 60-day comment period on the proposal.

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