SEC Proposes Rule That Would Require Public
Companies to Disclose Emissions

The Securities and Exchange Commission (SEC) has announced a proposed rule that would require all publicly traded companies to disclose their greenhouse gas emissions and attendant risks in the financial statements that they submit to the agency.

Under the proposed rule, all publicly traded firms would be required to share the emissions they generate at their own facilities, and larger businesses would need to have these numbers vetted by an independent auditing firm, the SEC said. If the indirect emissions produced by a company’s suppliers and customers are “material” to investors or included in the company’s climate targets, the SEC said those emissions must be disclosed as well.

Specifically, the rule would require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements.

Companies that have made public pledges to reduce their carbon footprint would have to detail how they intend to meet their goal and to share any relevant data. They would also need to disclose their reliance on carbon offsets to meet their emissions reduction goals.

The public will have 60 days to submit comments on the proposed rule. The agency will review those comments before issuing a final rule, which will be voted on by the SEC’s four commissioners—three Democrats and one Republican. This process could take several months. In its fact sheet, the SEC said the new requirements would be phased in over several years. The largest companies would need to start disclosing climate risks in fiscal year 2023, while other firms would have until fiscal year 2024. Companies will get an extra year beyond those dates to include supplier and customer emissions, and to get emissions data audited.

The data generated by these disclosures would inform decisions made by investors and portfolio managers. According to the SEC fact sheet, “Investors …have expressed a need for more consistent, comparable, and reliable information about how a registrant has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan. The proposed rules are intended to enhance and standardize climate-related disclosures to address these investor needs”. The new disclosures could reveal which companies lag within their industries in cutting carbon emissions, leaving them more vulnerable to pressure campaigns from investors and the public.

The proposed rule could transform the SEC into one of the nation’s leading enforcers of climate-related disclosures. While environmentalists say that the agency is well-suited for this role, other experts are skeptical about whether it has the necessary expertise on climate issues.

As one might expect, environmentalists hailed the proposed rule as a crucial first step in forcing the private sector to confront the economic risks of a warming world, while some conservatives and business groups have come out against mandating any climate disclosures and may challenge the SEC proposal in court. One possible line of argument for challenging the proposed rule would be that it does not hold up to the “strict scrutiny test,” which says laws and regulations must meet a “compelling government interest” to be constitutional.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.