On March 21, 2022, the Securities and Exchange Commission proposed new rules that would require companies to disclose their greenhouse gas emissions and climate-related risks. The proposal, which was adopted on a 3-1 vote, is part of a broader effort by the US government to address climate change. Under the proposed rules, public companies would be required to report on their climate risks, including the costs of transitioning away from fossil fuels and the physical impacts of storms, drought, and higher temperatures caused by global warming.
the proposed rules
The proposed rules would require companies to disclose their greenhouse gas emissions, both directly and indirectly, such as those resulting from the consumption of their products or employee business travel. Companies would also be required to lay out their transition plans for managing climate risk, including how they intend to meet climate goals and progress made, as well as the impact of severe weather events on their finances. According to SEC Chairman Gary Gensler, “Companies and investors alike would benefit from the clear rules of the road” in the proposal. The required disclosures would include greenhouse gas emissions produced by companies directly or indirectly, such as from consumption of the company’s products, vehicles used to transport products, employee business travel, and energy used to grow raw materials.
reaction to the proposed rules
The proposal has been met with both support and opposition. Climate activists and investor groups have long advocated for mandatory disclosure of climate-related information, arguing that it would provide investors with a more complete picture of a company’s risks and opportunities. On the other hand, major business interests and Republican officials have expressed opposition to the proposed rules, arguing that they would impose substantial costs on businesses and are beyond the SEC’s authority. Hester Peirce, the sole Republican among the four SEC commissioners, voted against the proposal, stating that “We cannot make such fundamental changes without harming” companies, investors, and the SEC. “The results won’t be reliable, let alone comparable,” she added.
the broader context
The SEC’s proposal is part of a government-wide effort to address climate change. In May 2021, President Joe Biden issued an executive order calling for concrete steps to blunt climate risks, while spurring job creation and helping the US reduce greenhouse gas emissions that contribute to climate change. The order set a target to cut US greenhouse gas emissions by as much as 52% below 2005 levels by 2030, and to adopt a clean-energy standard that would make electric power carbon-free by 2035. The Financial Stability Oversight Council, a group of top federal regulators including the Federal Reserve and the Treasury Department, has also warned that climate change poses risks to financial institutions and the financial system.
potential challenges
The proposal may face challenges in the coming months. The US Chamber of Commerce and the American Petroleum Institute, the oil industry’s top trade group, have argued that the SEC is reaching beyond its authority and that the mandatory reporting rules would impose substantial costs on businesses. A group of 16 Republican state attorneys general, led by Patrick Morrisey of West Virginia, has also raised objections to the proposal, arguing that companies are well-positioned to decide whether and how to satisfy the market’s evolving demands for both customers and investors. Morrisey has previously threatened to sue the SEC over expanded disclosures from companies of environmental, social, and governance information. The threat of litigation may loom over the proposal as it moves forward.
The proposed rules have significant implications for companies and investors alike. As the US government continues to take steps to address climate change, companies will be required to disclose more information about their climate-related risks and opportunities. This increased transparency will provide investors with a more complete picture of a company’s risks and opportunities, and will help to ensure that companies are taking steps to manage their climate-related risks. While the proposal may face challenges in the coming months, it is an important step towards addressing the risks posed by climate change and promoting a more sustainable future. With the support of President Biden and other government agencies, the SEC’s proposal is likely to move forward, and companies will be required to disclose more information about their climate-related risks and opportunities. As SEC Chairman Gary Gensler noted, the proposed rules will provide companies and investors with clear rules of the road, and will help to promote a more sustainable future.
