US regulators have voted to require large, publicly traded companies to disclose climate change-related information to investors, though the rule’s scope has been significantly scaled back from the original draft proposal.
The long-awaited rule which was finalized in a 3-2 vote by the Securities and Exchange Commission (SEC) on Wednesday, marks the first nationwide climate disclosure rule in the US. Some experts say it will give investors more transparency into the threat the climate crisis poses to corporations and how they contribute to global warming.
But one former acting SEC chair said the final version “paves the way for greenwashing”. And at Wednesday’s hearing, some commissioners lamented the agency weakening the rule.
“While it has my vote, it does not have my unencumbered support,” said SEC commissioner Caroline Abbey Crenshaw, who said the new standard constituted the “bare minimum”.
The SEC has long faced pushback from business interests and Republican state officials who claim the standards are a form of agency overreach. Though the final rule has been severely watered down, it is expected to inspire a slew of lawsuits from rightwing officials and corporate interests.
Just hours after the rule was approved, the West Virginia attorney general, Patrick Morrisey, announced that a group of nine Republican-led states will challenge it in court. But the legal hurdles may not only come from the right: the environmental group Sierra Club, represented by the legal nonprofit Earthjustice, also said Wednesday it is considering challenging the SEC’s “arbitrary” removal of key provisions from the final rule, though representatives say the group would defend the SEC’s authority to implement such a standard.
Under the original proposal, all public companies would have been required to calculate and report certain greenhouse gas emissions. The final rule, by contrast, will apply only to large businesses.
Asaf Bernstein, who served as senior academic adviser to the SEC on the new climate rule noted that the companies to whom the rule applies constitute 95% of US market capitalization. But some climate advocates have criticized the narrowed scope, noting that some 60% of all domestic public companies, including smaller companies and emerging growth businesses – which generally have less than $1.2bn in annual revenues – will be exempt.
Beginning in 2025, those larger public companies will be required to disclose short- and long-term physical climate risks to their assets, such as potential exposure to hurricanes and droughts. They will also need to reveal any spending related to their climate goals, such as purchases of carbon offsets or renewable energy credits. Unlike the original proposal, the final rule does not require companies to state the climate expertise of members on their board of directors.
The rule will require companies to disclose pollution from certain greenhouse gases, but only if the corporations consider the emissions “material”, or of significant importance to their investors – another major change from the original proposal. In practice, this will leave reporting up to companies’ discretion, said Laura Peterson, corporate analyst at the environmental non-profit Union of Concerned Scientists.
Beginning in 2026, businesses who deem the information material will also be required to disclose both their direct and indirect greenhouse gas emissions. Direct or “scope 1” emissions stem directly from the burning of fossil fuels to produce products, drive vehicles or heat buildings, while indirect or “scope 2” emissions, come from energy purchased from utilities. To “address concerns raised by commenters”, the final rules will give registrants more time to file their emissions disclosures, the SEC chair, Gary Gensler, said at Wednesday’s hearing.
But unlike the agency’s 2022 draft rule, the final regulation will not require companies to disclose their “scope 3” emissions, or pollution generated by a company’s supply chain and the consumption of its products.
“Based on public feedback, we’re not requiring scope three emission disclosure at this time,” Gensler said at the hearing.
The change could help the rule withstand court challenges, legal experts say. But they will also make the overall rule less effective at promoting transparency and accountability, climate advocates say.
“By cutting Scope 3 disclosures from the rule, the SEC has fallen far short on a core mission – providing investors with the information they need to make investment decisions,” said David Arkush, director of the progressive advocacy group Public Citizen’s climate program, in an emailed statement.
The watering down of the rule, he said, “illustrates the peril” of a supreme court that recently moved to hamstring agencies’ regulatory power, including authority to regulate greenhouse gas emissions, showing that “agencies will self-censor and decline to execute their roles fully”.
“Scope 3 emissions are something many investors have been asking for for years because they account for a huge percentage of a company’s pollution,” said Peterson of Union of Concerned Scientists, which has long urged the SEC to impose requirements to disclose scope 3 emissions. Indeed, for most companies, scope 3 emissions represent more than 70% of their carbon footprint, according to the consulting firm Deloitte.
The treatment of scope 3 reporting has been highly controversial for corporations, said Peterson. One reason, she said, is that accounting for that pollution can make companies “look really bad”.
Another reason for the controversy, said Bernstein: they can cause regulatory complications by potentially compelling small businesses who purchase products from larger corporations to publish their emissions.
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“It would potentially feel like it imposes the disclosure requirements on private firms, small firms, international firms, which otherwise wouldn’t be under the purview of the SEC,” said Bernstein, who is also associate professor of finance at University of Colorado, Boulder.
Though the rules were scaled back, some SEC commissioners still said it constituted overreach.
“These changes do not alter the rule’s fundamental flaw: its insistence that climate issues deserve special treatment,” commissioner Hester Peirce, who was appointed by President Donald Trump to the SEC, said on Wednesday.
Since first publishing its nearly 500-page draft proposal in March 2022, the SEC has received more than 24,000 comments on the new climate disclosure requirements, the agency said on Wednesday – the most comments in the agency’s history. Bernstein said the comments “hugely influenced” the final regulation.
“I could imagine a world where regulators get letters … and they go into a special folder called ‘trash’,” he said “But that was not my experience at all. They really informed the process.”
The US joins other countries, including China, Chile, Egypt, European Union member countries, India and the United Kingdom, which also require climate reporting by public companies.
In October, Governor Gavin Newsom of California signed a law requiring large companies doing business in the state to give a detailed accounting of their greenhouse gas emissions, starting in 2026. They will affect about 5,300 corporations, including major companies like Chevron, Wells Fargo and Amazon that will also have to comply with the new SEC rules.
The new rules come as Republican lawmakers and corporate interests also push back on the use of environmental, social and governance principles, known as ESG. It also comes amid increasing public concern about vague corporate claims about their climate plans.
But some experts said the weakening of the rule amounted to a gutting and should not do much to ease those concerns.
“Under the new rule companies will not have to disclose the bulk (or in some cases any) of their GHG emissions,” said Allison Herren Lee, former commissioner and acting chair at the SEC who now works with the whistleblower law firm Kohn, Kohn & Colapinto. “It paves the way for greenwashing.”
Charles Slidders, a senior attorney at the non-profit Center for International Environmental Law, said the agency caved to “industry pressure”, and that the rule “threatens to give a veneer of legitimacy to woefully inadequate corporate reporting on climate impacts and risks”.
“The SEC’s approach also represents an abdication of the agency’s authority and responsibility to address significant financial risks,” he said. “Climate change unquestionably poses such risks.”
