SEC Greenlights Watered-Down Climate Risk Disclosure Rules

Meghan Hall
·5 min read

The U.S. Securities and Exchange Commission (SEC) on Wednesday approved a rule that will mandate a subset of U.S. public corporations to disclose information about their greenhouse gas emissions and climate risks that could impact their businesses.

But throughout the process, which began in 2022, the SEC saw major resistance from companies about one part of the rules that ultimately ended up on the chopping block. Under the newly approved rules, the SEC will not require eligible companies to disclose their Scope 3 emissions.

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The rules passed in a three to two vote. The three affirming votes came from Democrats, while two Republican commissioners resisted.

New rules

Some public companies will soon be required to update their financial reporting practices, courtesy of the SEC.

The affected companies will be instructed to include information in their financial statements about how climate change could impact their business strategy, financial condition or operations, as well as specific insights into how they have worked to mitigate material climate-related risks.

Large accelerated filers (LAFs) and accelerated filers (AFs), designations which include the country’s largest public companies, will soon need to share information about their material Scope 1 and Scope 2 emissions.

While some companies already release impact reports or disclose their emissions and goals to decrease them, there has not previously been federal regulation that requires specific information to be shared.

According to the SEC, about 2,800 companies will be required to keep up with the new disclosure requirements. Over 500 foreign companies will also be mandated to report additional information to investors.

Gary Gensler, the chairman of the SEC, said the requirements aim to help investors access relevant information about the companies they pour dollars into.

“Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about climate risk,” Gensler said in a statement. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, 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, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Overlooking the scope of the issue

The exclusion of Scope 3 emissions from the regulations means that the SEC will not require companies to share the impact of the emissions created throughout the supply chain.

In the fashion and apparel context, that means retailers won’t have to share information about emissions created by factories that weave the textiles used in garments, the manufacturers that stitch apparel together or the third-party logistics providers that transport the finished goods to warehouses.

Caroline Crenshaw, a commissioner for the SEC, voted for the rules to be passed but said it should not be a final destination, but rather a starting point.

“Today’s recommendation adopts an unnecessarily limited version of these disclosures,” she said in a statement.

Crenshaw also highlighted that in the 24,000 public comments the SEC received while considering the rules, a number of investors noted that Scope 3 emissions disclosures do influence their decisions.

“Today’s final rule excludes requirements to disclose Scope 3 GHG emissions, despite comments making it abundantly clear that they represent a key metric for investors in understanding climate risk, particularly transition risk,” Crenshaw noted. “Today we remove any Scope 3 requirement—even one with a safe harbor that would have shielded issuers from liability for good faith estimates in reporting.”

According to McKinsey, Scope 3 emissions make up about 80 percent of many companies’ total carbon footprint. In fashion, apparel and home—each textile-reliant industries—the reality is much more stark: as much as 98 percent of total emissions from companies operating in those industries come from Scope 3 emissions.

Tepid optimism

Though activists—and many investors—expressed that the SEC’s new requirements around Scope 1 and Scope 2 emissions divulgences could be a useful jumping off point, they also noted that because the rules omit mention of Scope 3, the federal regulator has shirked its duty to give investors a comprehensive look into companies.

David Arkush, director of Public Citizen’s climate program, said the SEC’s rules don’t do nearly enough to work toward better transparency around climate change.

“By cutting Scope 3 disclosures from the rule, the SEC has fallen far short on a core mission—providing investors with the information they need to make investment decisions,” Arkush said in a statement. “Ninety-seven percent of investor comments on the proposal favored comprehensive reporting of greenhouse gas emissions. Rather than heed investor demand, the SEC caved to special interests and was cowed by litigation risk.”

The 97 percent figure Arkush references comes from a 2022 analysis of investor sentiment around safe-harbored Scope 3 emissions disclosures. The SEC continued to collect feedback on that until Tuesday, amassing about 24,000 comments from interested citizens, companies, organizations and investors.

Ben Jealous, executive director of the Sierra Club, said the SEC has taken a strong first step toward better disclosures, but condemned its lack of regulation on Scope 3 emissions disclosures.

“Thanks to the SEC’s actions, companies will finally be required to provide reliable and comparable information to investors and the market about some of their climate-related financial risks. While a positive step, this rule falls significantly short of what’s needed. Greenhouse gas emissions are a critical measure of a company’s handling of climate risk and Scope 3 emissions represent the vast majority of emissions from most companies,” Jealous said in a statement.

Adopting the requirements

The rules will go into effect 60 days after publication in the Federal Register, but the actual adoption of the rules won’t occur until the 2025 fiscal year, at the earliest. Some companies won’t be required to finalize changes until the 2028 fiscal year.

Those determinations are made based on the way a company has registered with the SEC. Smaller public companies face less stringent adoption deadlines than their counterparts registered as LAFs and AFs do.