The U.S. Securities and Exchange Commission on Wednesday approved a rule that will require some public companies to report their greenhouse-gas emissions and climate risks, after last-minute revisions that weakened the rule in the face of strong pushback from companies.
The rule was one of the most anticipated in recent years from the nation’s top financial regulator, drawing more than 24,000 comments from companies, auditors, legislators and trade groups over a two-year process. It brings the U.S. closer to the European Union and California, which moved ahead earlier with corporate climate disclosure rules.
Canadian regulators, public companies and environmental activists have watched the SEC process closely, especially as provincial securities commissions work toward their own climate disclosure rules, aiming to align with major trading partners.
Publicly traded companies will be required to say more in their financial statements about the risks climate change pose to their operations and their own contributions to the problem. But the version approved was weaker than an earlier draft, with changes that weren’t made public until Wednesday’s meeting.
The narrowed rule doesn’t include requirements that companies report some indirect emissions known as Scope 3. Those don’t come from a company or its operations, but happen along its supply chain – for example, in the production of the fabrics that make a retailer’s clothing – or that result when a consumer uses a product, such as gasoline.
Companies, business groups and others had fiercely opposed requiring Scope 3 emissions, arguing that quantifying such emissions would be difficult, especially in getting information from international suppliers or private companies.
In Canada, a previous attempt at formalizing reporting stalled two years ago, when it appeared the U.S. regulator was moving to tougher regulations than those being contemplated here, including a requirement to report Scope 3 emissions. Those are the largest category of greenhouse gases a company emits.
Now, Canadian Securities Administrators, the umbrella group for the provincial regulators, is restarting efforts to bring in climate disclosure requirements, based largely international rules that are being tailored for the domestic economy by the Canadian Sustainability Standards Board.
The CSA said last month it plans to launch a new consultation on the “proposed scope” of reporting requirements once the CSSB finalizes its initial standards in late summer or early autumn. Sustainable finance experts have warned that Canada risks being left behind in the global race for climate-focused capital as the process drags on.
“This has some big implications for Canada, and will affect Canadian firms registered with the SEC,” said Ryan Riordan, the director of research for the Institute of Sustainable Finance at Queen’s University. “But more than that there is a real risk that we’re being left behind as the rest of the world sets sustainable finance regulations.”
The SEC’s decision to exclude Scope 3 emissions will disappoint climate advocates, but Europe’s tougher plans will be hard to implement, he said. Meanwhile, stringent rules for Scope 1 and 2 emissions – those from a company’s operations and the energy it buys – will bolster Scope 3 reporting in the future, Mr. Riordan said.
The rule passed 3-2, with three Democratic commissioners supporting it and two Republicans opposed.
SEC Commissioner Caroline Crenshaw, a Democrat, voted for passage but called the rule “a bare minimum” that omits important disclosures. She called Scope 3 emissions a “key metric for investors in understanding climate risk” and said investors are already using such information to make decisions.
Commissioner Hester Peirce, a Republican who opposed the rule, said it would be burdensome and expensive for companies and would trigger a flood of inconsistent information that would overwhelm, not inform, investors.
“However well intentioned, these particularized interests don’t justify forcing investors who don’t share them to foot the bill,” Ms. Peirce said.
The final rule also reduces reporting requirements for other types of emissions, known as Scope 1 and 2. Scope 1 emissions refer to a company’s direct emissions, and Scope 2 are indirect emissions that come from the production of energy a company acquires for use in its operations.
Companies would only have to report those emissions if they believe they are “material” – in other words, significant – to investors – a decision that ultimately allows companies to decide whether they need to disclose emissions-related information. And small or emerging companies don’t have to report emissions at all.
“Climate risk is financial risk. This is a sensible rule to protect investors,” said Elizabeth Derbes, director of financial regulation and climate risk at the Natural Resources Defense Council. “What’s wrong with this rule is that it needs to do much more,” she added. “Investors have been pressing for mandatory disclosure of greenhouse gas emissions, and the agency needs to give them a fuller picture of companies’ risk exposure.”
The final rule will affect publicly traded companies with business in the U.S. ranging from retail and tech giants to oil and gas majors. The SEC estimates that roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the U.S. will have to report information related to their emissions.
– With files from The Globe’s Jeffrey Jones