Will the SEC weaken its long-awaited climate disclosures rule?

The SEC is considering easing its climate disclosure risk rule. Marie-Anne Vincent, our VP of Climate Finance explains the elements that are being pushed back on and what’s likely to happen next.

In March 2022, the U.S. Securities and Exchange Commission (SEC) released its proposed climate disclosure rules, which would require U.S. companies to provide information on climate risks and on strategies to address those risks, along with the carbon emissions arising from their operational climate footprint, and in some cases emissions emanating across their value chains (the famous scope 3). For more detail, take a look at our handy summary.

But after receiving nearly 15,000 public comments on that proposal from companies and investors, the SEC is now considering easing the controversial climate risk disclosure rule. 

Which elements are being pushed back on? 

The 1% requirement

One element of the proposal that has drawn criticism is the rule requiring climate costs to be reported if they total 1% or more of each line item in corporate financial statements. Line items reflect income and expenses, such as revenue and cost of goods. The requirement was deemed an important step towards improving transparency and accountability in corporate reporting on climate risks. It would also help investors and other stakeholders make more informed decisions about their investments.

The disclosure of value chain emissions

Another element that has been pushed back on is the requirement to report on emissions in company’s value chains. This was an important step towards improving corporate reporting on climate risks. According to data from the CDP, on average, a company’s supply chain emissions are 11.4 times higher than those from its own operations. 

What will a weakening of the rule mean in practice? 

This is clearly not good news coming from the US in a context of international climate disclosure convergence.

• To make informed investment decisions, investors will need to have complete access to the climate risks and opportunities related to their portfolio companies.

• Stepping down and excluding Scope 3 emissions in the final ruling will put US companies at a disadvantage relative to global peers who are conducting and reporting complete climate analyses.

• In addition to the ISSB and EFRAG discussions, we need a convergence towards a common language for climate reporting, allowing comparability and effective assessment of climate risks.

The rules will be challenged in court. Some of the allegations include the idea that the SEC exceeded its authority, that it didn’t follow the correct procedures and that it didn’t do a proper economic analysis.

What’s next? 

The SEC is expected to make a ruling on climate disclosures by April. We hope that there won’t be too many cuts to the initial proposal.

The SEC is also busy setting up new rules on ESG and greenwashing by October:

• It plans to finalise the review of latest rules on ESG resolutions and soften it to give more power to investors on matters of stewardship and shareholder rights. It will make it easier to vote in favour of climate related resolutions.

• October is also the deadline set by the SEC to amend its fund name rules to ensure that funds being sold are as sustainable as they claim to be, with a policy to invest at least 80% of their assets in accordance with the fund’s name.

• As seen in the UK and in Europe, this is the end of the road for greenwashing – the SEC will also require asset managers to report on their ESG approach and strategy. 

To be continued. Watch this space.