Companies May Soon Have to Reveal Emissions Data and Climate-Related Risks – Sky Bulletin
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Under a prospective rule to be determined by a Wednesday vote, the U.S. Securities and Exchange Commission (SEC) is poised to obligate businesses to disclose their carbon emissions and potential climate-related risks that could affect their financial performance.
The ruling would impact a broad spectrum of U.S. public companies and has garnered substantial attention, indicated by the plethora of over 16,000 comments submitted during the proposal phase. These companies might soon need to be more transparent within their financial documents about both the hazards climate change could pose for them and the role they play in driving climate change. Potential financial implications of transitioning to cleaner energy sources and the physical dangers associated with extreme weather events caused by climate change are among the data that would require disclosure. The SEC’s initiative seeks to unify these disclosures across the board.
Steven Rothstein from Ceres, a nonprofit focused on addressing environmental issues with businesses and investors, supports this direction. “Being able to measure a problem is crucial to managing it, and this new rule is a key step toward that goal,” he asserts.
Reports anticipated on the day of the SEC meeting suggest that the proposed rule might exclude controversial “Scope 3” emissions — those which are not directly produced by the companies themselves, but rather are associated with their supply chain or result from consumer usage of their goods. The SEC has not commented on these reports, though SEC Chairman Gary Gensler has indicated previously that the Scope 3 requirements were a significant point of contention in finalizing the rule.
Considering the fierce opposition by companies and business groups to mandatory Scope 3 emissions reporting—claiming difficulties in quantifying emissions from international or private entities—it’s uncertain whether the final rule includes Scope 3. Nonetheless, proponents of fuller disclosure argue that Scope 3 emissions often make up the major portion of a firm’s emissions footprint and that many companies are increasingly tracking this data. Kristina Wyatt of Persefoni, a carbon accounting firm, notes the growing ease for companies to report on their own and their suppliers’ emissions.
The distinction between Scope 1 and Scope 2 emissions is also clarified, referring respectively to direct emissions from a company and indirect emissions from energy procurement.
Legal battles are very likely for the SEC’s ultimate ruling due to some accusations against Gensler of exceeding his authority. However, Gensler has advocated for a standardization in emissions reporting. With three out of five SEC commissioners appointed by President Biden and two by former President Trump, there’s a potential for political influence at play.
Regardless of the SEC’s decision, international movements are underway; California and the European Union have both enacted comprehensive disclosure laws. These requirements will drive companies to declare substantial climate-related data, independent of SEC regulations, as pointed out by Wyatt.
The rest of the world’s progress in this domain might overshadow the impact of the SEC’s actions, suggests Wyatt.
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FAQs About the SEC Climate Disclosure Rule
What does the SEC climate disclosure rule propose?
The rule would require publicly traded companies to disclose their greenhouse gas emissions and any risks that climate change may pose to their business operations.
What are Scope 3 emissions?
Scope 3 emissions are indirect emissions not produced by the company itself, but occur from activities in the supply chain or from the use of the products sold by the company.
Why is there controversy over Scope 3 emissions reporting?
Some companies and business groups argue it’s difficult to accurately measure Scope 3 emissions, especially from international suppliers or private companies. Proponents of fuller disclosure say this data is critical as it often represents most of a company’s carbon footprint.
What would be the impact of the SEC’s potential rule on companies?
Companies would have to be more transparent about climate-related financial risks and their own contributions to climate change. While many firms already track this data to some extent, the rule would standardize reporting across the industry.
Will this rule apply only to U.S. companies?
The SEC rule would apply to all publicly traded companies with operations in the U.S., not just American firms.
Conclusion
The SEC’s potential rule on climate disclosure represents a significant move towards standardized transparency in the corporate response to climate change. By enforcing this rule, companies would be better equipped to assess and disclose the financial risks associated with climate change and their own environmental impact — a shift that could influence investment decisions and consumer behavior. Despite potential legal challenges and criticism, the SEC’s actions reflect a growing trend worldwide, as seen with similar measures in California and the EU. As the global community continues to prioritize environmental sustainability, these disclosures become increasingly vital for the accountability and evolution of corporate practices.