By Hiroko Tabuchi, Ephrat Livni and David Gelles
The Securities and Exchange Commission approved new rules earlier this week detailing if and how public companies should disclose climate risks and how much greenhouse gas emissions they produce, but there are fewer demands on businesses than the original proposal made about two years ago.
The rules represent a step toward requiring corporations to inform investors of their greenhouse gas emissions as well as the business risks they face from floods, rising temperatures and weather disasters. An earlier and more all-encompassing proposal faced outspoken Republican backlash and opposition from a range of companies and industries, including fossil fuel producers.
The main difference: Under the original proposal, large companies would have been required to disclose not just planet-warming emissions from their own operations but also emissions produced along what’s known as a company’s “value chain” — a term that encompasses everything from the parts or services bought from other suppliers, to the way that people who use the products ultimately dispose of them. Pollution created all along this value chain could add up.
Now, that requirement is gone.
In addition, the biggest companies will have to report the emissions they directly produce, but only if the companies themselves consider the emissions “material,” or of significant importance to their bottom lines, a qualification that leaves corporations leeway. Thousands of smaller businesses are exempt, another big change from the original proposal, which would have required all publicly traded corporations to disclose their direct emissions.
Also gone from the final rules is a requirement that companies state the climate expertise of members on their board of directors.
But the directive for companies to disclose significant risks related to climate change — for example, risks to waterfront properties owned by a hotel chain from rising sea levels and storm surges — survived.
On Wednesday afternoon, West Virginia Attorney General Patrick Morrisey said that 10 states planned to challenge the new rules in the U.S. Court of Appeals for the 11th Circuit.
Many companies are already disclosing climate-related information, and investors are already making choices with that data in mind. However, SEC Commissioner Caroline Crenshaw called the current approach “a haphazard potpourri.”
The SEC has said the new rules were meant to meet investors’ demands for better, more comparable data on emissions and risks than what companies voluntarily include in their sustainability reports, which are often difficult to verify. “Today’s rules enhance the consistency, comparability and reliability of disclosures,” SEC Chair Gary Gensler said.
Supporters of stronger disclosure requirements said the omissions could undermine the rule altogether. “Thanks to corporate lobbying, disclosure of the very real financial risks from climate change has fallen victim to the culture wars,” said Allison Herren Lee, former acting chair and commissioner at the SEC, who had championed more climate-related disclosures.
The SEC proposed the climate rules almost two years ago. Since then, it has considered thousands of comments from companies, business groups and others weighing in on the potential regulation.
Many corporations argued that the regulations would be onerous and expensive, and fail to offer investors much useful information. Republican lawmakers have also been pushing back on the business world’s embrace of environmental, social and governance principles, known as ESG.
In recent weeks, more financial firms have walked back their own climate commitments, suggesting that the political pressure was having an effect.
Also weighing on the SEC as it mulled the final rules is a Supreme Court that has shown a willingness to entertain conservative challenges to regulation and to limit agencies’ power, including authority to regulate greenhouse gas emissions.
With the specter of litigation in the background, it was clear that the SEC was trying to put out a rule on solid legal footing, said Cynthia Hanawalt, director of financial regulation practice at the Sabin Center for Climate Change Law at Columbia Law School.
“The opposition that we’ve seen is largely driven by the fact that we have a huge fossil fuel industry and lobby in the United States,” she said. “That’s why there’s such tremendous opposition here that has not come up in other jurisdictions around the world that are putting forward similar climate-related disclosure rules.”
Business groups led by the U.S. Chamber of Commerce have already sued to block a California law that goes further and still requires companies to disclose emissions from suppliers and others. The Chamber said Wednesday that it was reviewing the new rules and would continue to “use all the tools at our disposal, including litigation if necessary, to prevent government overreach.”
In addition to West Virginia, the states seeking court review of the rule are Georgia, Alabama, Alaska, Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming and Virginia. The group said it would argue that the rules are unrelated to investors’ financial returns, that the SEC lacks authority to set the rules and that the requirements may violate companies’ First Amendment rights.
“This is a backdoor move to undermine the energy industry,” Morrisey said.
At the same time, environmental organizations are gearing up to sue, saying the final rules fall short. The Sierra Club said it was “considering challenging the SEC’s arbitrary removal of key provisions from the final rule.” And it would also defend the commission’s authority to implement such a rule in the first place, the Sierra Club said.
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