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4 April 2024 Article

New SEC Climate Disclosure Rule

The Securities and Exchange Commission, the United States federal agency that monitors and enforces rules relating to securities, has passed a new climate disclosure rule.

By Klappir

A small step in the right direction

The rule, passed on March 6th 2024 require certain companies to disclose material climate-related risks, activities to mitigate or adapt to such risks, information about the companies’ boards’ oversight of climate-related risks and management’s role in managing material climate-related risks and information on any climate-related targets or goals that are material to business, results of operations, or financial condition of said companies.

The aim of these rules is to provide investors with consistent, comparable, and useful information on the disclosure requirements, to inform their investment decision making.

In addition, so-called large, accelerated filers (LAFs) and accelerated filers (AFs) will be required to disclose their material scope 1 and scope 2 greenhouse gas emissions. While that is a step in the right direction, the rule, as it was passed, makes several concessions to its opponents compared to the originally proposed rule, as made available to the public for consultation in 2022. Most notably, the fact that the previous draft proposed that public companies would disclose their Scope 3 GHG emissions. This was a significant concession made to the rule's opponents, and because of it, public companies will not have to disclose their Scope 3 emissions. Why is this important? Well, scope 3 greenhouse gas emissions are considered most relevant because they encompass indirect emissions associated with a company's activities, including those in its value chain, such as suppliers, customers, and product lifecycle. These emissions often represent the largest portion of a company's carbon footprint and can have significant environmental and economic impacts. Addressing Scope 3 emissions is crucial for achieving comprehensive sustainability goals and mitigating climate change effectively.

All in all, while the passing of the SEC’s climate disclosure rule is an obvious step forward in promoting transparency and accountability regarding climate related risks, its shortcomings are equally obvious. This is especially evident when we look across the Atlantic to the EU’s bureaucracy that is phasing in the Corporate Sustainability Reporting Directive starting in 2024, with both a broader scope of companies required to report and much more detailed reporting requirements, including all three GHG-protocol scopes but also a broad selection of other topics which may or may not be material for reporting entities.

In any case the decision to omit Scope 3 greenhouse gas emissions from the SEC rule’s disclosure requirements is a notable concession to those who oppose the rule idealistically, and one that raises questions about the rule's effectiveness in providing insight into emitters’ true impact. Cautious optimism might conclude that the SEC is opting for a phased approach, prioritizing the implementation of this achievable goal while there is political and stakeholder consensus for it in the here and now. Building on that progress later to include scope 3 emissions and expanding the disclosure requirements to more reporting companies will be crucial if the US wants to have the information to take necessary and decisive action on climate change. Multinational companies headquartered in the US whose operations in Europe reach a certain threshold will become accustomed to that in the near future through the new CSRD-regime, so we can assume that data collection and reporting mechanisms will be in place. Will US-based stakeholders wake up to see the value in their data or will they let the opportunity go to waste?

Read more:
SEC Press Release 2024-3
SEC Fact sheet
SEC Final Rule

By Klappir4 April 2024

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