Boston, March 6, 2024 – The U.S. Securities and Exchange Commission (SEC) recently finalized its long-awaited Climate-Related Disclosure rule. Originally proposed two years ago, the rule was crafted in response to investor demand for consistent and comprehensive information about climate-related risks and acknowledgment by federal regulators of such risks to the financial system.
“It’s a step forward, but we feel it’s too little too late. We wish the SEC had held fast with their proposal to have companies report Scope 3, or indirect, emissions because investors need this data to make informed decisions about how companies are addressing their climate-related risks,” said Green Century President Leslie Samuelrich. “Companies’ indirect emissions often represent the majority of their total emissions. Vigorous opposition by trade groups, including the U.S. Chamber of Commerce and the American Farm Bureau Federation, has restricted investors’ access to vital information.”
The initial draft rule was considered a victory for investors and public interest organizations who were concerned about companies not fully disclosing or downplaying their climate risks. They argued investors could be unknowingly investing billions of dollars in businesses that were not adequately addressing their financial risks.
“Institutional investors have been seeking this information and every day investors would potentially benefit from knowing how the companies in their 401(k), IRAs and other investments are addressing climate risk,” said Samuelrich.
But some business groups opposed the parts of the regulations that require large companies to disclose climate-threatening emissions caused by suppliers and customers and have threatened legal action. However, not including these indirect emissions may result in litigation too. Several nonprofits, including Earthjustice, a leading public interest environmental law nonprofit, indicate they may mount a court challenge if major aspects such as indirect carbon emissions, are dropped from the new ruling.
Regulatory and investor pressure continues
Meanwhile, regulatory and investor pressure continues. The new California Corporate Climate Accountability Act and the European Union’s Corporate Sustainability Reporting Directive, will require larger companies to begin reporting their Scope 3 emissions in 2027 and 2025, respectively.
And while mandatory reporting is preferred, many companies already willingly report the greenhouse gas emissions from their operations and supply chains. Green Century recently has worked with several companies, including Costco, Kroger, and Corning and convinced them to report on their carbon emissions, including Scope 3 emissions.
“Smart companies have recognized climate change as a material risk and already are taking steps to address it. As we say, what gets measured gets managed, and isn’t every investor looking for a well-managed company?” said Samuelrich.
Nevertheless, some important aspects of the rule remain in place. The SEC will require companies to explain how severe weather events such as hurricanes, wildfires, drought and other natural catastrophes impact their strategies, operations, and financial positions when costs to address such events exceed a certain monetary threshold. The rule will also create a framework to improve the consistency of quantifying Scope 1 and 2 emissions data and will phase in a requirement for third-party verification depending on the size of the company.