SEC sets vote on landmark climate rule

By Avery Ellfeldt | 02/29/2024 06:47 AM EST

The proposal was once hailed as a “watershed” for U.S. markets, but activists fear the final version won’t require companies to disclose enough about their planet-warming emissions.

SEC Chair Gary Gensler testifies Sept. 15, 2022, before the Senate Banking, Housing and Urban Affairs Committee.

SEC Chair Gary Gensler testifies Sept. 15, 2022, before the Senate Banking, Housing and Urban Affairs Committee. Kevin Dietsch/Getty Images

The Securities and Exchange Commission faces its moment of truth next week on climate change. And some of the agency’s main cheerleaders already are bracing for disappointment.

The SEC is set to vote Wednesday on a rule that would force public companies to divulge a swath of information about their climate risks, plans and planet-warming emissions.

The move promises to shed more light on the financial threats companies across the economy face from a hotter planet. But the rule — long hailed as a big step forward for climate policy — is no longer expected to deliver the punch it initially promised.


In the nearly two years since its introduction, Republicans and business groups have threatened the SEC with legal challenges and urged the agency to weaken the proposal, which they argue would be unworkable for companies and is outside the agency’s authority.

Now, the agency is pulling back. In the latest draft, the SEC dropped a requirement that certain large companies disclose the planet-warming emissions produced by their suppliers and customers, known as Scope 3, POLITICO reported last week.

The agency also is likely to weaken a measure that would have required companies to report the emissions resulting from their operations and energy usage, known as Scope 1 and Scope 2 — which could amount to a larger pullback than proponents originally expected.

And that could turn longtime supporters of the rule into future adversaries.

“The SEC should consider that litigation risk runs both ways,” said Andres Restrepo, senior attorney with the Sierra Club.

How the requirements take shape will determine whether the U.S. will be considered a leader on the issue or cede that role to Europe and governments elsewhere. It also will dictate whether planet-warming companies will have to calculate, verify and report the full extent of their climate risk — or continue touting climate goals and achievements with relatively little oversight.

“The fact that some in the industry are fighting so hard not to have to reveal this climate information says a lot about how much we should be worried about the activities taking place behind closed doors,” said Sen. Elizabeth Warren (D-Mass.), who has repeatedly called on the agency to finalize a strong rule.

“Every company has surely looked at what its own disclosures would be, and they want to make damn sure that the American public can’t see it,” she added.

An SEC spokesperson said in an email that the agency does not “comment on speculation about what may be in or out of a rulemaking.”

Years in the making

The vote on the climate rule has been a long time coming.

As early as 1971, the SEC put out an “interpretive release” that said companies should consider disclosing, when relevant to investors, the cost of complying with environmental laws. And in 2010, the agency released nonbinding guidance that prodded public companies to disclose, when material, their exposure to climate change.

But it wasn’t until 2021 that the SEC solicited public feedback on how mandatory climate risk reporting rules should work. One year later, the agency released its proposed rule — marking a “watershed moment” for U.S. investors and financial markets, then-SEC Commissioner Allison Herren Lee said at the time.

The move came as top officials across the federal government were paying greater attention to climate change’s threat to the global financial system, prompted in part by President Joe Biden. The proposal marked the first major step by a U.S. financial regulator to do something about it.

As proposed, the rule would require publicly listed companies to report information about how extreme weather events and the clean energy transition might affect their business. That would entail disclosing more details about their climate goals, climate-related costs and planet-warming emissions.

The draft rule heralded a major win for green groups, investors and lawmakers concerned about companies ignoring or downplaying the full extent of their climate risks, which they argue could result in investors blindly pouring billions of dollars into risky businesses.

But it also sparked opposition and legal threats from conservatives and business groups, focused in large part on the agency’s handling of Scope 3 emissions.

The proposed rule would require two types of companies to disclose the emissions associated with their suppliers and customers: those that acknowledge their indirect emissions are “material” to their investors and those with emissions reductions targets that include Scope 3.

Critics in the fossil fuel, agriculture and financial services industries as well as some lawmakers — including some moderate Democrats — said calculating Scope 3 would be incredibly complex and could result in private companies being asked to cough up emissions data. They also argued it could lead to “inconsistent, incomparable, and unreliable reporting.”

Those concerns have prevailed despite SEC officials’ assurance that companies could use estimates and averages to calculate Scope 3 and that no private companies would be required to disclose climate information.

“We’ve heard comments that that wasn’t good enough, from you and from others,” SEC Chair Gary Gensler said last September in response to questions from Sen. Jon Tester (D-Mont.). “And that’s [why] we’re looking about how we can find an appropriate path forward.”

‘Shocking departure from the proposal’

With just six days until the agency is scheduled to vote on the final rule, it appears that opponents may get what they wanted — at least as it relates to emissions disclosures.

In the latest draft of the landmark rule, the agency scrapped the Scope 3 requirement, POLITICO has reported, citing a person familiar with the matter who was granted anonymity to discuss nonpublic information.

The move may not completely thwart legal challenges from opponents, but it would signify a major win for industry groups that have decried the rule — given that the bulk of many companies’ greenhouse gas emissions are tied to their customers and suppliers.

Among them: oil and gas companies and big banks. The vast majority of those industries’ carbon footprints are associated with the products they sell and financing they provide, versus their own operations or energy use.

A Democratic aide said the SEC’s expected pullback on Scope 3 guts one of the rule’s most consequential features. The provision, they said, would have provided a deeper look into the emissions that can be traced to the financing activity of Wall Street firms, such as big banks.

It’s not the only area expected to see substantive changes. The Democratic aide said their understanding is that the SEC also has removed mandatory reporting requirements for Scope 1 and 2 emissions, instead linking their disclosures to how significant or material they are to investors.

The expected tweaks to Scope 1 and 2 reporting are a “shocking departure from the proposal,” said the aide, who was granted anonymity to discuss the still-unreleased rule.

Bryan McGannon, a managing director at the sustainable investment advocacy group US SIF, said there’s been “an acceptance that Scope 3 would likely be pared back.”

But his organization’s view is that “Scopes 1 and 2 should be mandatory.”

That’s the case in large part, he said, because “all the firms that would be required to report have the data for that. They have the receipts.”

Recent indications that the final rule was being teed up — and that it might look substantially different from the proposed version — spurred a coalition of advocacy organizations to meet with the agency’s Democratic commissioners.

The SEC is made up of three Democratic commissioners — including Gensler — and two Republicans. The Democratic majority is expected to approve the final rule.

Sharmeen Contractor of Oxfam America, which participated in the meetings, described them as a “last-minute push” to voice the concern that “anything short of a robust rule is going to codify the patchwork of disclosures that we already see.”

Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, also participated. He emphasized that it’s not yet clear what a materiality standard on Scopes 1 and 2 would entail, but that it could “give companies that were laggards the ability to avoid disclosure.”

The Sierra Club and Earthjustice, for their part, have indicated they’re willing to challenge the rule in court if the agency drops major provisions from the proposal, including Scope 3.

“Proponents of the rulemaking have stressed that even a weakened rule is a necessary and important step forward,” said Restrepo, of the Sierra Club. “But the elimination of key disclosure requirements is not supported by the law nor endorsed by the vast majority of comments submitted on the proposal.”

Declan Harty, Jordan Wolman and Eleanor Mueller contributed.