S.E.C. Considers Climate Disclosure Rule - The New York Times

The Securities and Exchange Commission has said for the first time that public companies must tell their shareholders and the federal government how they affect the climate, a sweeping proposal long demanded by environmental advocates.

The nation’s top financial regulator gave initial approval to the much-anticipated climate disclosure rule at a meeting on Monday, moving forward with a measure that would bolster the Biden administration’s stalled environmental agenda.

The proposed rule — approved by a 3-1 vote — was a major step toward holding companies accountable for their role in climate change and giving investors more leverage in forcing changes to business practices that have contributed to rising global temperatures.

Ben Cushing, who leads the Sierra Club’s push for stronger climate disclosures, cheered what he called a “long-overdue step” and urged the commission to quickly finalize “the strongest rule possible.”

“Investors and the public deserve to know the climate-related risks that companies face and how they are being addressed,” he said in a statement. “This is especially important given how many companies have made commitments to address their climate impact without disclosing the full scope of their emissions, the risks their own businesses face from climate change, or the relevant business plans to achieve their climate pledges.”

The public will have up to 60 days to comment on the plan. If enacted, it would set up a reporting framework requiring companies to begin providing information about the climate-related impact of their businesses in their annual reports and stock registration statements.

But the proposal has already has provoked opposition from some business trade groups and may be challenged in court — which could delay its effective date.

Regulators have said the rule builds on guidance the S.E.C. issued in 2010 for companies about disclosing information on climate change — information that the commission believes is “material” to investors, meaning they need it in order to make an informed decision about buying or selling a stock. The S.E.C. took that action around the same time the Environmental Protection Agency began requiring some large companies to compile data on the emission of greenhouse gases.

“Over the generations, the S.E.C. has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions,” the commission’s chairman, Gary Gensler, said in a statement accompanying the announcement of the new rule.

The relevance of climate-related information is likely to be a point of contention in the months ahead.

The U.S. Chamber of Commerce, a business lobbying group, said that it broadly supported the goal of climate disclosure by companies but wanted a more “clear and workable” rule. Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness, said the group was concerned that companies would be forced to disclose information that is not material to investors.

“We will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad,” Mr. Quaadman said.

In a discussion with investors after the commission vote, Mr. Gensler said the S.E.C. would seriously consider the comments from companies, investors and legal community before it enacted a final disclosure rule. “We look forward to the public comments,” he said.

Many companies have already begun to release information about their greenhouse gas emissions. The S.E.C. estimates that a third of the 7,000 corporate annual reports it reviewed in 2019 and 2020 included some climate impact disclosures.

Some companies — including Apple, Facebook and Microsoft — report extensive data and have set deadlines by which they hope to have zero carbon emissions overall.

But the proposed rule, which runs for more than 500 pages, would formalize the reporting process. Companies would be required to conduct three levels of analysis of their impact on the climate — an analysis that is consistent with the way in which members of the scientific community consider the environmental impact of business activity.

In the first two stages, companies would have to disclose annually the direct impact of their operations on climate change in terms of the products they make and any indirect effects on the environment that come with using electricity, trucks or other vehicles.

The third phase of the analysis is more extensive and involves assessing the so-called carbon footprint of suppliers, business travel and any assets a company leases. The S.E.C. proposal would require only the largest companies to report this level of climate impact — known as Scope 3 emissions — and leave it up to individual companies to decide if the disclosures would be material to investors.

The disclosure of the Scope 3 emissions, which mainly include gases created by companies’ suppliers or more incidental operations, often dwarf the other two types. The requirement would not kick in for large companies for at least two years in most cases.

And large companies reporting Scope 3 emissions would initially get a so-called “safe harbor” provision from litigation by investors who believe the companies’ analysis was flawed. The S.E.C. opted for a safe harbor provision because Scope 3 emissions can be more complicated to analyze and compile.

Todd Phillips, director of financial regulatory and corporate governance at the Center for American Progress, said he still had some questions about how the rule would address Scope 3 emissions. But he added that the proposed rule gave investors “access to important information they need to make informed investing decisions.”

A growing share of investors — in particular those belonging to large mutual funds — have been pushing companies to disclose more information about the effect of their business on the climate. “Investors with $130 trillion in assets under management have requested that companies disclose their climate risks,” Mr. Gensler said in his statement.

Many investors and corporate executives are likely to welcome the proposed rule because they believe standardized climate disclosures will make it easier to compare the environmental efforts of companies. Microsoft wrote a letter supporting the commission’s climate push.

Large technology companies have cast themselves as leaders in moving away from fossil fuels, but they face headwinds as well. Microsoft, which aims to be “carbon negative” by 2030, recently reported a rise in emissions.

Advocates for a climate disclosure rule have argued that it would better protect investors against the risk that a company’s value might fall suddenly, either because of changes in government environmental policies or consumers’ turning away from products that contribute to global warming.

But the push for tougher disclosure requirements reflects more than just concern for investors. Environmental advocates hope that rules requiring companies to measure and publicize their greenhouse gas emissions will encourage the businesses to take more aggressive steps to minimize their effect on the climate.

The S.E.C.’s rule came as the Biden administration struggled to implement its broader climate agenda. The limited progress it has made with emissions-focused legislation has left financial regulation as one of the main tools it has to change the behavior of companies as climate change worsens.

Last week, one of the Biden administration’s nominees to serve on the Federal Reserve, Sarah Bloom Raskin, withdrew from consideration because of opposition from business groups and Republicans to some of her writings that argued financial regulators need to focus more on how companies affect the climate. She withdrew her name after Senator Joe Manchin III, Democrat of West Virginia, said he would not vote to confirm her.

Christopher Flavelle contributed reporting.

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