New Climate Impact Disclosure Rules for US Companies

The age of greenwashing has moved one step closer to its end. The Securities and Exchange Commission, which regulates listed businesses in the USA, has proposed rule changes that would require much greater transparency from its members - the largest companies in corporate America - over their climate impacts and the related risks for investors.

Companies will need to make more climate-related disclosures in their company registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. 

The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess the company’s exposure to such risks.

The SEC building in Washington DC. The SEC regulates public companies in the USA. Picture ablokhin on iStockPhoto.

Basically, if adopted - and this is still at proposal stage - this will make it easier and more transparent for all of us to assess whether a company is walking the talk over the climate.

SEC Chair Gary Gensler said: “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”

Up until recently, it’s been relatively difficult to dig into a company’s actual environmental performance, often needing to peel aside many layers of obfuscation, jargon or legalese.  Common reporting standards have also been lacking, meaning that lawyers and lobbyists have had a field day in representing ‘alternative truths’.

Investors need reliable information about climate risks to make informed investment decisions

Gary Gensler continued: “Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. 

“Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."

Gary Gensler of the SEC, which is proposing the new rules for environmental disclosure. Picture from SEC.

Importantly, the proposed rules would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions, known as Scope 1 emissions, as well as indirect emissions from purchased electricity or other forms of energy (Scope 2). 

In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. 

This will lay bare - in audited numbers - the total actual environmental impact of an organisation on the wider world.  Major US energy companies such as ExxonMobil have, historically, chosen to be far less forthcoming about their Scope 3 emissions than their European counterparts such as BP or Shell (even though campaigners want them to go a lot further still).  From the companies’ perspective, the SEC rules would provide a ‘safe harbor for liability’ from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

The SEC proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. 

America being America, the news hasn’t been welcomed in all quarters. Some Republicans are incensed. Senator Patrick Toomey, the Senate Banking Committee's most senior Republican told Reuters that this "extends far beyond the SEC's mission." It is expected that legal challenges will be mounted against the proposed rules.