Companies must disclose emissions information under new SEC plan

Ben Bain, Robert Schmidt and Saijel Kishan March 21, 2022

(Bloomberg) — Companies will need to reveal detailed information about their greenhouse gas pollution under a new U.S. Securities and Exchange Commission plan, portending a major shift in how corporations must show they are dealing with climate change.

For the first time ever, the agency plans to require businesses to outline the risks a warming planet poses to their operations when they file registration statements, annual reports or other documents. Some large companies will have to provide information on emissions they don’t make themselves, but come from other firms in their supply chain.

The proposal released on Monday sets up a major clash with industry lobbyists and Republican politicians who argue the regulations are outside the SEC’s jurisdiction. Liberal lawmakers, environmental advocates and the SEC, however, say mom-and-pop investors need the information to make informed decisions.

“Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions,” SEC Chair Gary Gensler said in a statement. “Today’s proposal would help issuers more efficiently and effectively disclose these risks.”

The SEC would also require that auditors or other experts review the climate disclosures for large- and medium-sized companies. The requirements would be phased in over time.

Climate activists will likely cheer the agency’s decision to require larger companies to disclose some of their so-called Scope 3 emissions, which are generated by other firms in their supply chain or customers using their products. That information, which business groups say is very hard to quantify, wouldn’t be subject to an audit.

Some companies, including oil giant Exxon Mobil Corp., have already begun disclosing those emissions voluntarily.

Hester Peirce, who opposed the plan as the agency’s only Republican commissioner, said the proposal would ultimately end up costing investors.

“Society is in big trouble if we are looking to SEC lawyers, accountants, and economists to dictate how companies should address climate change,” said Peirce, who in a symbolic protest turned off her camera during the virtual meeting, saying that she was trying to reduce her carbon footprint.

The release of the proposal follows months of internal debate among the agency’s Democrats over how far to extend the disclosure requirements. Ultimately, the regulator settled on using the longstanding but vague concept of “materiality” to determine what information must be disclosed, a term that the agency hopes could make the rule less vulnerable to legal challenges.

Many of the plan’s elements align with a reporting regime known as the Task Force on Climate-Related Financial Disclosure. That voluntary framework asks corporations to disclose greenhouse gas emissions and report on how they manage global-warming risks. Michael Bloomberg, founder and majority owner of the parent company of Bloomberg News, is chairman of that effort.

As expected, the U.S. Chamber of Commerce took issue with the SEC’s action. The group “is concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors,” said Tom Quaadman, executive vice president of the Chamber’s Center for Capital Markets Competitiveness.

Business and environmental advocates will spend the coming weeks pouring over the rule’s details. The SEC will take public comment for as long as 60 days, and may revise the proposal before holding a second vote to finalize the regulation.

Still, the proposal is likely to face legal challenges. “The federal courts are increasingly becoming an arena where policy disagreements are settled, and this rule will likely be no different,” said Satyam Khanna, a consultant who served as a climate adviser to Allison Herren Lee, a Democratic commissioner.

After the vote, Gensler declined to comment about the expected lawsuits, though he stressed that the plan is narrow and within the agency’s remit. “This is a disclosure-based proposal” and not an attempt by the SEC to dictate companies’ environmental policies, Gensler told reporters. He wouldn’t specify when the agency would release a final rule, adding that the regulator would “take the time appropriate to get it right.”

The plan would also require companies to disclose:

How management is preparing to deal with climate-change risks
Any climate issues affecting strategy or business model, and impacts of severe weather events
Use of analysis scenarios run by a company to determine climate resilience
Internal carbon pricing models