Today, the Securities and Exchange Commission (SEC) – Wall Street’s regulatory body, adopted new rules aimed at enhancing and standardizing climate-related disclosures by public companies and in public offerings. The organization made the ruling in response to investor demands to be provided with consistent, comparable, and reliable information about the financial effects of climate-related risks and how best to manage those risks. The suggestion for new rules was initially brought up in March 2022 and the SEC considered over 24,000 comment letters before making a final decision on the new rules.
What the New Rules Mean
The new rules mean that companies will have to disclose certain climate-related risks. This is aimed at ensuring companies communicate greenhouse gas emissions, weather-related risks and other climate-related issues with investors. It is expected to encourage firms to be more transparent about their efforts to clean up operations and transition to low-carbon operations. Investors will now be provided with a better understanding of a company’s emissions, as well as potential risks from floods, rising temperatures and weather disasters.
The rules are the first of its kind, but it less strict than the original 2022 draft, with some environmentalists suggesting the SEC is not doing enough to hold companies accountable. A previous version of the proposal asked big companies to collect and report data on greenhouse gas emissions (Scope 3 emissions) from suppliers and end-users of their products, in certain situations, but this was not adopted. Instead, large companies will be permitted to determine whether they share information about their own operations and the power they purchase. In addition, companies will not be required to disclose the climate expertise of members on their board of directors.
A Message from the SEC
The SEC Chair Gary Gensler stated “Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure.’” He added, “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”
Gensler explained, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
What’s Next?
Two Republican commissioners opposed the new rules, while the three Democrat members voted in favor of the change. It is a surprising move from the SEC, which is using its power to bring about social change through the disclosure rules in line with the green transition currently taking place in the U.S. While investors and environmental activities will likely be optimistic about the change, the move is expected to bring about staunch opposition from companies looking to avoid spending time and money on gathering climate data to disclose to investors.
Commissioner Jaime Lizárraga, who voted in favor of the new rules, suggested that while the SEC will likely face criticism from those believing the organization overstepped its role and others who think it fell short, the commission should not let “the perfect be the enemy of the good.”
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Felicity Bradstock is a freelance writer specializing in Energy and Industry. She has a Master’s in International Development from the University of Birmingham, UK, and is now based in Mexico City.
