Last week, March 6, 2024, the Securities and Exchange Commission (SEC) approved new rules on which U.S. public companies are required to report regarding their greenhouse gas emissions and vulnerability to climate change.
The rules that were initially proposed would have applied to all U.S. publicly traded companies, among other things, and they solicited considerable pushback. After modification, the new regulations passed the SEC on a 3-to-2 vote, and they are likely to be contested in court since there is opposition from both sides of the issue.
Still, the SEC rules are a significant step toward more transparency in U.S. corporate climate reporting.
What is Required
The new SEC reporting rules apply only to U.S. companies whose stock is valued at $75 million or more, which is a large swath of corporate America. There are three annual reporting requirements for these companies beginning in 2026:
- Report the costs the company has incurred due to severe weather events and other natural disasters.
- Disclose actual and potential material impacts of climate-related risks to a company’s strategy, business model and outlook. For example, operations in coastal regions that are at risk from rising sea levels and storm surges.
- Report greenhouse gas emissions produced by company operations, BUT ONLY IF the company deems the emissions “material” or of significant importance to its profitability.
The emissions to be reported are categorized as Scope 1 and 2. Scope 1 refers to direct greenhouse gas emissions from company-owned or controlled facilities or vehicles; Scope 2 covers indirect GHG emissions associated with a company’s purchase of electricity, steam, heat, or cooling.
Initially, there was also a requirement to report Scope 3 emissions produced by activities in the company’s “value chain” – from its suppliers to how customers dispose of its products. However, Scope 3 was cut from the final rule and a materiality standard has been applied to Scope 1 and 2 reporting. Also cut was the requirement that companies disclose the climate expertise of members on their board of directors and report the financial impacts of climate transition risks (only the aggregate impacts of physical climate risk will now be required).
The New Rules in Context
Justina Lai, Chief Impact Officer at LNW, notes that it is disappointing that the SEC rules have been weakened, especially since Scope 3 emissions are the most material for many businesses.
However, she also believes that the new SEC rules are at least a step in the right direction, and they start to bring the U.S. in line with Europe and other jurisdictions like California. “They provide greater transparency and access to more consistent and comparable data to help investors make better decisions.”
Currently, the majority of U.S. public companies do not disclose emissions or climate change risks: Of the nearly 2,400 companies in the MSCI USA Investable Market Index (IMI), less than half — 45% — disclose their Scope 1 and 2 emissions, and only 29% disclose some (and not necessarily the most material) Scope 3 emissions, which make up the lion’s share of emissions for most companies. Source: MSCI.com.
Justina also notes that the new rules signal the financial materiality of climate-related risks, which is something impact investors have recognized for a long time: “Disclosure requirements for transition plans and management oversight in managing climate-related risks will be valuable for investors in assessing companies’ climate risk exposure and preparedness for the transition though investors will need to continue pushing for more critical information to fully assess climate risk.”
Read this Q&A with Justina on impact investing at LNW.
Increasingly, climate risks are being factored into financial operations and forecasts, and the more standardized and reliable the information the better. In 2023, the National Ocean and Atmospheric Administration reported that the U.S. experienced 28 weather and climate disasters – a record – and that each cost at least $1 billion.
“As climate change intensifies, natural disasters and warming temperatures can lead to declines in asset values that could cascade through the financial system. And a delayed and disorderly transition to a net-zero economy can lead to shocks to the financial system as well. These impacts are not hypothetical.” — U.S. Treasury Secretary Janet Yellen at the first meeting of the Climate-related Financial Risk Advisory Committee (CFRAC), March 2023.
