SEC Passes Historic but Scaled-Back Climate Disclosure Rules

In a groundbreaking move, the U.S. Securities and Exchange Commission (SEC) has officially passed its first-ever climate disclosure rules, a development that promises to reshape corporate reporting and shed light on the environmental impact of publicly traded companies. The decision, reached in a Wednesday vote, is seen as a legacy-defining effort for SEC Chair Gary Gensler.

The rule, one of the most significant overhauls of U.S. corporate reporting in recent years, mandates thousands of public companies to provide more detailed information about their exposure to climate risks, the financial implications of severe weather events, and, in some cases, their greenhouse gas emissions.

The proposal, which has been in the works for the past two years, has faced intense lobbying and threats of litigation from various quarters. However, the final rule is expected to be a scaled-back version compared to the original proposal from March 2022. Despite the compromises, the SEC is likely to face legal and legislative challenges, with the U.S. Chamber of Commerce expected to file a lawsuit, and congressional Republicans expressing intentions to try to overturn the rule.

One of the key alterations to the rule involves the exclusion of Scope 3 disclosures, which would have required certain large companies to provide data about emissions generated by their suppliers and customers. Critics argued that this provision was unworkable and could entangle private companies supplying publicly traded ones. The SEC responded to concerns about the cost and reliability of complying with Scope 3 requirements by removing them from the final rule.

The final rule focuses on disclosures related to Scopes 1 and 2 emissions, with companies having more leeway to disclose information about their operations and energy use only if they are deemed significant or material to reasonable investors. Smaller companies are generally exempt from greenhouse gas emissions disclosure requirements.

The phased implementation of the rule is set to span the next decade, with certain provisions taking effect for large companies in 2025. Among the key reporting mandates are requirements for disclosing material climate-related risks, companies' transition plans, and the costs, expenses, and losses arising from wildfires, hurricanes, and other severe weather events.

While the rule represents a significant step toward increased transparency in corporate climate reporting, critics argue that it still falls short of providing investors with a comprehensive look into companies' carbon footprints, especially in terms of their supply chains. The SEC's response to industry concerns may open the door to legal challenges, leaving the agency with a long road ahead in the realm of climate disclosure.

Despite the ongoing challenges, proponents of the rule see it as a crucial step in addressing climate-related risks and ensuring a more standardized and accessible framework for investors to evaluate companies' environmental impacts. The legal battles that lie ahead are likely to test the SEC's authority and the broader regulatory landscape in an era marked by increasing scrutiny of federal regulators.

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