SEC Takes a Step Back on Climate Rules

The SEC finalized much-awaited climate disclosure rules this week, issuing a significantly watered-down mandate requiring large companies to disclose Scope 1 and Scope 2 emissions only. The rule is a significant addition to current disclosure, but nowhere near as onerous as it could have been.

What happened: The decision, finalized in a 3-2 vote along party lines, stopped short of mandating the reporting of Scope 3 emissions from suppliers, which was part of the original proposal, and removed the requirements entirely for small companies.

• Under the approved regulations, large accelerated and accelerated filers will be required to disclose direct (Scope 1) and indirect (Scope 2) emissions if material. Additionally, companies must disclose climate-related risks such as the financial impacts of severe weather events – but not on each line item of the financials. See a summary of what’s in and what’s out of the final rule here.
  
  
• The implementation of these regulations will occur gradually over several years, with the largest filers expected to begin reporting by 2025 and full compliance anticipated by 2033.

Why it matters: The SEC was overwhelmed with comment letters from companies and investors alike warning that proposed rules were unfeasible, especially regarding the requirement to disclose Scope 3 emissions. The fact that the SEC scaled back the final rules so significantly could indicate the agency is concerned about legal action and overstepping its bounds – and this could bode well for upcoming human capital metrics rules.

All opposed: The SEC's decision faced opposition from its two Republican commissioners. Commissioner Mark Uyeda criticized the rule, alleging that it was” climate regulation in disguise,” while Commissioner Hester Peirce said the SEC lacked the authority to enact the rule in the first place and would be “spamming” investors with information.

Next steps: The rules have already been challenged in court and may hold the dubious distinction of being the first rule to cause lawsuits from both sides of the political aisle. Compliance dates will be phased in for large and midsize companies, another change from the proposal and from previous rules, such as the Dodd-Frank Pay Versus Performance rule, which required lightning-fast compliance despite a short comment period.

Stay tuned for forthcoming rules on human capital metrics and board diversity now that the decks have been cleared.