SEC approves new climate rules that are much weaker than originally proposed

The Securities and Exchange Commission on Wednesday approved new rules detailing whether and how public companies must disclose climate risks and the amount of greenhouse gas emissions they produce, but there are fewer requirements on companies than the original proposal introduced nearly two years ago.

The rules represent a step toward requiring companies to inform investors about their greenhouse gas emissions as well as the business risks they face from floods, rising temperatures and weather disasters. An earlier, more sweeping proposal faced vocal backlash from Republicans and opposition from a range of companies and industries, including fossil fuel producers.

Key difference: Under the original proposal, large companies would have had to disclose not only greenhouse emissions from their own operations, but also emissions produced along what is known as the company's “value chain” — a term that includes everything from parts or Services purchased from other suppliers, to the way the people who use the products ultimately dispose of them. The resulting pollution can accumulate along this value chain.

Now, this condition is gone.

In addition, large companies will have to report the emissions they produce directly, but only if the companies themselves consider the emissions to be “material,” or of significant importance to their bottom line, a qualification that leaves companies free to act. Thousands of small businesses are exempt, another big change from the original proposal, which would have required all publicly traded companies to disclose their direct emissions.

Also removed from the final rules was the requirement that companies cite the climate expertise of members on their boards.

But the guidance requiring companies to disclose significant risks associated with climate change – for example, the risks to waterfront properties owned by a hotel chain from rising sea levels and storm surge – has remained in place.

On Wednesday afternoon, West Virginia Attorney General Patrick Morrisey said 10 states planned to challenge the new rules in the U.S. Court of Appeals for the 11th Circuit.

Many companies already disclose climate-related information, and investors are already starting to make their choices with this data in mind. However, SEC Commissioner Carolyn A. Crenshaw, the current approach is described as “random desiccant”.

The SEC said the new rules are intended to meet investor demands for better and more comparable data on emissions and risks than what companies voluntarily include in their sustainability reports, which is often difficult to verify. “Today’s rules enhance the consistency, comparability and reliability of disclosures,” SEC Chairman Gary Gensler said.

Supporters of stronger disclosure requirements said this omission could undermine the rule entirely. “Thanks to corporate pressure, disclosing the true financial risks from climate change has become a casualty of the culture wars,” said Allison Herren Lee, acting chairwoman and former SEC commissioner, who has advocated for more climate-related disclosures.

Climate disasters, including extreme weather such as hurricanes, floods and droughts, are taking a heavy toll on lives and businesses around the world, disrupting supply chains and damaging crops. In 2023, the United States will experience 28 weather and climate disasters each costing at least $1 billion. According to the National Oceanic and Atmospheric Administration. Treasury Secretary Janet Yellen said so last year Losses associated with climate change could “ripple through the financial system.”

Tim Scott, the top Republican on the Senate Banking Committee from South Carolina, said the agency had exceeded its authority. “Last time I checked, the SEC was the only securities regulator that does not employ climate scientists, and it clearly acted without regard to the onerous burdens imposed on companies of all sizes,” he said in a statement.

Some Democratic lawmakers also opposed the SEC's initial proposal, believing it would be a burden on small farmers.

Commissioner Jaime Lizarraga, who supported the rules, noted that the final version would face criticism from those who felt it went too far, and from those who felt it fell short. But ultimately, he said, the committee should not allow “the perfect to be the enemy of the good.” The rules passed by a vote of 3-2, with Republican commissioners dissenting.

The SEC proposed climate rules nearly two years ago. Since then, it has considered thousands of comments from companies, business groups and others who weigh in on potential regulation.

Many companies claimed that the regulations would be burdensome and expensive, and fail to provide much useful information to investors. Republican lawmakers have also been opposed to the business world's embrace of environmental, social and governance principles, known as ESG.

In recent weeks, more financial companies have backed away from their climate commitments, suggesting that political pressures are having an impact.

Also weighing heavily on the SEC's mind as it considers the final rules is the Supreme Court, which has shown itself willing to accept conservative challenges to regulation and limiting the power of agencies, including the power to regulate greenhouse gas emissions.

With the specter of litigation in the background, it was clear the SEC was trying to put the rule on a solid legal footing, said Cynthia Hanawalt, director of the financial regulation practice at the Sabin Center for Climate Change Law at Columbia Law School.

“The opposition we've seen is largely due to the fact that we have a huge fossil fuel industry and lobbyists in the United States,” she said. “That's why there's tremendous opposition here that hasn't been seen in other jurisdictions around the world introducing similar climate-related disclosure rules.”

Business groups led by the U.S. Chamber of Commerce A lawsuit has already been filed To prevent a California law that goes even further and still requires companies to disclose emissions from suppliers and others. The chamber said Wednesday it was reviewing the new rules and would continue to “use all tools at our disposal, including litigation if necessary, to prevent government overreach.”

In addition to West Virginia, states seeking court review of the rule include Georgia, Alabama, Alaska, Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming and Virginia. The group said it would argue that the rules have nothing to do with investors' financial returns, that the SEC lacks the authority to make the rules and that the requirements may violate companies' First Amendment rights.

““It is a backdoor move to undermine the energy industry,” said Mr. Morrissey, West Virginia’s attorney general.

Meanwhile, environmental organizations are preparing to file a lawsuit, saying the final rules are insufficient. The Sierra Club said it “considers challenging the SEC's arbitrary removal of key provisions from the final rule.” It would also defend the committees' authority to implement such a rule in the first place, the Sierra Club said.

There is some evidence that climate disclosure rules could have an impact on human emissions of greenhouse gases, the most important driver of climate change, said Assaf Bernstein, a finance professor at the University of Colorado Boulder who focuses on climate issues. “In other countries, when they put in place disclosure requirements, there were what appeared to be reductions in emissions in response to those disclosures,” he said.

Even if the SEC's rules have faced challenges, some companies have begun voluntarily reporting more information about their emissions and the risks posed by climate change, said Amelia Meyazad, a professor at the University of California, Davis, School of Law.

“There is a clear investor demand for information, so the business community must respond to that demand,” she said.

Christopher Flavell Contributing reporting from Washington, D.C