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SEC adopts climate risk disclosure rules

The SEC finalized climate risk disclosure rules to provide investors with consistent information about publicly filed businesses -- but the vote was not without controversy.

The U.S. Securities and Exchange Commission finalized climate-related risk disclosure rules in a 3-2 vote Wednesday after two years of analysis, meaning publicly traded businesses will need to report emissions data in company filings to the SEC.

The climate disclosure rules will require large accelerated filers and accelerated filers to report data for Scope 1 emissions, or direct emissions, and Scope 2 emissions, which are derived from purchased sources such as energy. The final rules eliminate the originally proposed reporting requirement for Scope 3 emissions, or those connected to third-party sources. Companies will also be required to disclose climate-related risks that could have a material impact on their business strategy, operations or financial condition.

The final rules, outlined in an 886-page document, will become effective 60 days after publication in the Federal Register. Compliance dates will be phased in for companies and will depend on the company's filing status, according to the SEC.

After the vote Wednesday, SEC Chair Gary Gensler said he's pleased to see the rules adopted because they benefit both investors and companies. Since first publishing the proposed rules in 2022, the SEC has received feedback from more than 24,000 stakeholders.

"It will provide investors on the one hand with consistent, comparable, decision-useful information, and on the other hand, issuers with clear reporting requirements," Gensler said.

Effects on enterprises

Companies will be required to report a quantitative and qualitative description of material expenditures incurred as part of their strategy to mitigate climate-related risks, according to the SEC. Businesses will also need to disclose information about climate-related targets and goals, as well as any processes they have for identifying and managing climate-related risks.

In addition, the SEC wants companies to disclose capitalized costs and losses that result from extreme weather events such as hurricanes, tornadoes, floods and wildfires. While larger companies will be required to report Scope 1 and 2 emissions, smaller companies will be exempt from such reporting requirements for now.

The new rules will likely cause drastic changes to businesses' disclosure and auditing processes, said Steve Soter, vice president and industry principal at compliance-as-a-service platform provider Workiva, in a statement.

In a survey from Workiva, 74% of 894 business leaders reported that compliance with requirements such as the SEC's new climate risk disclosure rules will be more challenging over the next 12 months, and 67% of business leaders reported being concerned with their business's ability to comply with new requirements.

Complying with the new rules means that businesses will need to view changes in financial results "through the lens of climate impacts," Soter said.

On the other hand, 85% of business leaders and investors surveyed agreed that ESG data should receive the same assurances as financial data.

However, Soter said the final rules differ from what was originally proposed and stand in stark contrast to climate reporting requirements outlined in rules such as the European Union's Corporate Sustainability Reporting Directive.

"Notably, these new rules, softened from their original proposal, set a relatively low bar in comparison to other widely accepted climate disclosure requirements," he said.

The SEC's new climate risk disclosure rules will bring consistency to businesses reporting climate data, said Judson Aiken, senior director of risk and ESG solutions at AuditBoard, in a statement. The rules are a step forward in bringing "sustainability reporting on par with financial reporting," he said.

"Today's climate risk disclosure ruling by the SEC promises to bring a new era of corporate transparency," Aiken said.

Commissioners respond to disclosure rules

SEC Commissioner Hester Peirce spoke against the rules on Wednesday, claiming that climate reporting will unfairly raise costs for publicly traded businesses. She added that the additional reporting will overwhelm the SEC, which does not have the expertise to oversee climate risk disclosures.

Peirce also raised concerns about whether the SEC rules would preempt state rules such as California's recently adopted climate reporting requirements. Preemption will be determined by the courts, according to SEC staff.

"The rules' anticipated benefits do not outweigh the costs," Peirce said.

Indeed, SEC Commissioner Mark Uyeda said the commission conducted a "flawed process" by not re-proposing the climate disclosure rules and implementing significant changes after receiving thousands of comments.

"At a minimum, a re-proposal could have resulted in a better estimate of the costs and benefits associated with this rulemaking," he said.

In addition, Uyeda said he believes Congress should have been the deciding body on climate disclosure rules for the U.S., rather than the SEC.

While important, this rule could have been more.
Caroline CrenshawCommissioner, U.S. Securities and Exchange Commission

SEC Commissioners Caroline Crenshaw and Jaime Lizárraga voted in support of the climate risk disclosure rules. Lizárraga said the rules will help address issues of greenwashing, or when companies make untrue claims about their positive climate impacts.

Crenshaw expressed some displeasure with the final version, which softened some requirements proposed in the initial rules. She said the final rules provide the "bare minimum" to investors.

"While important, this rule could have been more," she said.

Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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