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New SEC Emissions Disclosure Rules Spark Mixed Reactions
The SEC’s new climate disclosure rules are either too narrow or a compliance burden, depending on whom one asks. Which is it?
10 Min Read
stockphoto-graf via Alamy Stock
On March 6, 2024, the SEC announced new rules to enhance and standardize climate-related disclosure for investors. Only two of the three “scopes” survived. Scope 1 focuses on a company’s operational carbon footprint, Scope 2 is about power consumption, and Scope 3 covers supply chain emissions.
According to the SEC’s press release, the Commission responded to “investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operation and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.”
The new rules apply to public companies and public offerings. Those organizations will be required to include the risk disclosures in SEC filings as opposed to just posting them on a website.
Whether the new rules are a blessing or a curse depends on whom one asks. Some say the new rules are too narrow and that they should have included supply chain disclosures, while others say the narrower scope is more practical. Some consider compliance an unnecessary burden with dubious benefits.
It should be noted that Scopes 1, 2 and 3 have been adopted in the EU and California. As with all compliance issues, many organizations are choosing to comply with the most stringent rules, not only because they need to do it in California and the EU, but because it’s good business.
“The early majority are not doing this because some regulation came out. They’re using it to sell more product, cut costs, and position themselves against the competition,” says Neil D’Souza, CEO and founder of product lifecycle intelligence software company Makersite. “The second bucket of companies are check-boxing, and these are the people who would rather not have this regulation in place.”
The Benefits of Climate-Related Disclosures
SEC Chair Gary Gensler was quoted in the press release saying, “The rules will provide investors with consistent, comparable and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose which will produce more useful information that what investors see today.”
One proponent of the new rules is Niki Armstrong, chief administrative and legal officer at storage solution provider Pure Storage.
Niki Armstrong, Pure Storage
“I support the SEC’s decision to require companies to disclose their emissions and the climate risks they face. This is a positive step toward greater transparency and achieving ESG goals, which is imperative for all companies to take into consideration,” says Armstrong in an email interview. “With greater transparency comes greater trust from customers and investors, the latter of which is the impetus of this. It will ultimately prove to be a step in the right direction for society and the planet, outweighing the burden of compliance.”
Tim Weiss, co-founder and CEO of climate tech firm Optera, says the new rules are an important incremental step, but the exclusion of Scope 3 is short-sighted.
“Without understanding Scope 3, your supply chain, you cannot have any perceived concept of your underlying risks -- how your products are made, how they’re shipped, how they’re consumed,” says Weiss. “If you’re an investor, the third-party emissions problem is very real. It has been my hope all along that the solution to climate [change] is not just funneling money to the ESG team, it’s to build accountability across the organization, year to year, quarter to quarter.”
He also said people should not view the new rules as a leading indicator.
“Everyone’s looking at regulations as leading indications of what’s happening when regulations are a lagging indicator,” says Weiss. “Some organizations have been reporting emissions for 15 to 20 years and they’ve been quantifying Scope 3 emissions for that long. They’re actively trying to find better data. They’re working with their suppliers and [vendors] to get better information and intelligence.”
Potential Challenges
The new rules aren’t being met with a warm welcome from everyone, albeit for different reasons.
“We anticipate that the SEC’s final climate disclosure rule is likely to be litigated extensively in court, with potential litigants challenging the agency’s authority to issue such prescriptive rules,” says Ken Markowitz, change leader and partner at law firm Akin, in an email interview. “We expect stakeholders will challenge the final rule on various grounds, ranging from the agency exceeding its authority in issuing final rules (as discussed in the ‘major questions’ doctrine in West Virginia v. EPA), to the final rules compelling speech in violation of the First amendment and the agency not going far enough by virtue of excluding disclosures around Scope 3 emissions.”
David Suny, managing partner at law firm McCormack Suny says the proposed reporting requirements are likely to have a significant impact on publicly traded companies with short-term financial impacts that will hopefully be balanced by long-term climate benefits. He sees legal challenges looming under the Chevron doctrine (US Supreme Court 1984) and other grounds.
David Suny, McCormack Suny
“The Chevron case is the seminal decision that identified that some legislation may leave gaps in interpretation and federal agencies are best suited in some circumstances to fill those gaps,” says Suny in an email interview. “In January 2024, the Supreme Court heard argument over another Chevron case -- whether the Department of Fisheries can mandate fishing inspectors to be paid $700 per day. The conservative wing of the Court expressed skepticism about this agency rulemaking.”
In this case, the SEC must tie the greenhouse emission regulation to its general mandate to protect investors, which is what it attempted to do in its announcement.
“While one can draw a connection between social consciousness and the priority of addressing climate change to shareholders’ financial stake in publicly traded companies, this argument could be made in almost any other context, and it seems like the greenhouse gas emissions rule will be fast-tracked to the Supreme Court,” Suny says.
Some of the key points he identified included the following:
Disclosure requirements: Businesses would need to disclose their climate-related risks, greenhouse gas emissions and net-zero transition plans. This includes both direct emissions and, in some cases, indirect emissions from their value chain.
Financial implications: The disclosures could reveal risks that are reasonably likely to have a material impact on the company’s financial condition or operating results. This may affect investment decisions and could lead to shifts in investor relations.
Governance and strategy: Companies will need to report on their governance of climate-related risks and the impact of these risks on their business strategy and outlook. This could lead to changes in business models and strategies to mitigate identified risks.
Operational changes: Compliance with these rules may require significant changes to operations, supply chains, and other aspects of business to manage and report on emissions effectively.
Market dynamics: The rules could shift market dynamics, creating new sector winners and losers based on their ability to adapt and disclose climate-related information.
Investor relations: As investors increasingly consider climate risks in their decisions, transparent reporting could become a competitive advantage for companies.
Overall, these requirements are expected to bring more transparency to the market, allowing investors to make more informed decisions regarding climate risks.
“The SEC is a powerful regulatory body that I predict will continue to command the respect and adherence of private industry even as they expand their reach beyond traditional securities regulation to cover topics of global importance, such as climate regulation,” says Suny. “I think compliance with its initiative will be a top priority, particularly as private industry comes to the realization that investment decisions will be increasingly made based, at least in part, in companies deemed socially responsible, based on their carbon footprint.”
Steve Blonder, principal at law firm Much Shelist also expects the new rules to be litigated.
“The West Virginia attorney general is leading 10 states in challenging new rules in federal court,” says Blonder in an email interview. “Today, most companies are not doing as comprehensive a job of data gathering as contemplated by the SEC’s new rules. The new rules have the potential to require companies to devote significant additional resources to meet the disclosure requirements.”
Brinkley Dickerson, an Atlanta-based partner in the corporate practice at Troutman Pepper, thinks it was prudent of the SEC to stop where it did, but he also foresees challenges.
Brinkley Dickerson, Troutman Pepper
“From the perspective of public companies, the final rules are a substantial improvement from what was proposed. The SEC dropped the disclosure requirement of so-called ‘Scope 3,’ which are emissions by downstream purchases and users of a company’s products and services,” says Dickerson in an email interview.
Dickerson argues that Scope 3 emissions are complex and extraordinarily difficult to estimate with accuracy, and it would have been costly, without any certain benefits for customers to estimate those emissions. The SEC also substantially reduced the amount of disclosure of climate-related costs that companies will have to make in their financial statements.
“There is a substantial school of thought that companies will spend billions of dollars identifying the required information, which is very granular compared to current disclosures and then auditing and reporting that information when there’s no substantive evidence that it will be meaningful to investors other than the very few for which ESG is the primary focus,” says Dickerson. “The SEC retained a requirement that for larger companies, Scope 1 and 2 disclosures [must] be accompanied by ‘attestations’ by audit firms or other experts. This is widely viewed as a solution without a problem. The SEC seems to assume that companies will lie or do a poor job – at a significant cost.”
Will the rules survive? Dickerson seems skeptical.
“I believe that the changes that were made are essential for there to be any chance for the final rules to survive judicial review. I do not believe the rules should survive [because] I believe that the essence of a significant portion of the rules is an intent to regulate emissions through requiring companies to make embarrassing disclosures,” says Dickerson. “I have talked with large investors, buy and sell-side analysts and others, and a majority of them to not believe the required disclosures are going to significantly affect their investment decisions or recommendations.”
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