Landmark rule requires some companies to share how much they pollute. But it was scaled back

Landmark rule requires some companies to share how much they pollute. But it was scaled back

Regulators passed a rule on Wednesday mandating companies to disclose their pollution levels, albeit in a significantly diluted form after facing two years of pushback. While some business leaders and lawmakers argued that the rule overreached, climate activists contended it fell short of addressing the issue adequately. The final version approved by the Securities and Exchange Commission (SEC) does not compel companies to disclose certain secondary climate impacts of their products.

SEC chairman Gary Gensler expressed confidence that the finalized rules would furnish investors with more useful information compared to the current standards. Nonetheless, only parts of the rule will be effective by 2025, coinciding with the Biden administration’s efforts to confront climate change.

Shivaram Rajgopal, a professor at Columbia Business School, described the rule as a predictable political compromise during an election year. Notably absent from the final version is the requirement for companies to divulge their indirect emissions, known as scope 3 emissions, which had been a contentious aspect of the SEC’s initial proposal in March 2022. Critics argued that tracking such emissions would be excessively costly and challenging for companies.

The revised rule necessitates large public companies to disclose both direct and indirect greenhouse gas emissions they deem significant enough to share with investors, termed as scope 1 and scope 2 emissions, respectively. Additionally, companies must divulge the physical risks posed by climate change, including the potential for increased natural disasters like wildfires and hurricanes.

Despite assertions from Gensler that scope 3 emissions were dropped based on public feedback, former SEC commissioner Allison Herren Lee criticized the compromises made, particularly for failing to address investors’ need for greenhouse gas emissions data comprehensively. Gensler defended the decision, citing the significant number of public comments received since the proposal’s release in 2022.

While some companies expressed concerns about the costs associated with tracking emissions, a survey conducted by Workiva revealed that the majority of institutional investors believe the new disclosure regulations will aid in making more informed investments. However, the SEC’s rule has drawn criticism from groups like the Sierra Club, who argue that it falls short of necessary measures.

Republican opposition to the rule persists, with nine state attorneys general filing a legal challenge, asserting that it remains flawed and unconstitutional. Republican lawmakers echoed these sentiments, denouncing the rule as federal overreach. SEC commissioner Hester Pierce, who opposed the rule, raised concerns about the financial burden it would impose on public companies.

Despite the limitations of the SEC’s rule, multinational companies operating in Europe and California may face stricter emission disclosure requirements under separate regulations. California’s climate disclosure bill, signed by Governor Gavin Newsom, mandates companies to disclose scope 1, 2, and 3 emissions starting in 2026, while Europe has implemented its own directive requiring certain companies to publish environmental and social information since January 2023.