A new rule requiring companies to disclose how much they pollute is coming in 2024

By CNN Newsource

Published December 30, 2023 3:00 AM

By Samantha Delouya, CNN

(CNN) — The Securities and Exchange Commission will decide by next spring on a rule to make public companies disclose how much they generate in greenhouse gases and how climate change could hurt their businesses.

The rule, which comes amid the Biden administration’s efforts to tackle climate change, has been met with backlash from business leaders and lawmakers who argue that it oversteps the SEC’s mission to safeguard investors and regulate markets.

“Congress created the SEC to carry out the mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation—not to advance progressive climate policies,” a group of Republican lawmakers wrote in a letter to the agency earlier this year.

Advocates say that in an age of expanding climate-related regulations, investors deserve to know the growing financial risks that some companies face from climate change – and laws curbing emissions – before deciding to invest.

What’s in the rule

The SEC first proposed its climate disclosure rule in March 2022, but since then, the agency has delayed releasing a final version on multiple occasions.

The proposal requires companies to share information on two forms of climate change risk: physical and transition risks.

Physical risks refer to climate change’s impact on a company’s operations, including the hazards of increased natural disasters like wildfires or hurricanes.

Transition risks refer in part to potential damage to a company’s profits due to a growing number of climate change regulations. As a result, the SEC rule would order companies to share pollution generated by their business operations, broken up into three categories: scope 1, 2 and 3.

Scope 1 and 2 are direct and indirect greenhouse gas emissions produced as a company conducts its business, such as waste produced by a manufacturing process or how much air conditioning is used in an office building.

Scope 3 refers to emissions that a company is indirectly responsible for, meaning they are not produced by the company but are created as a result of its product.

Consider an oil company: While it may have relatively low scope 1 and 2 emissions, the thousands of metric tons of carbon dioxide produced by gas-powered vehicles would be factored into its Scope 3 emissions, despite the fact that the oil companies do not produce cars.

Because scope 3 emissions occur outside of a company’s control, “it’s very challenging to gather all of that information,” said Rob Fisher, KPMG’s US ESG, or environmental, social and governance, leader.

In a recent fireside chat hosted by the US Chamber of Commerce, SEC Chair Gary Gensler acknowledged that businesses have expressed “questions and doubts and concerns” about measuring scope 3 emissions.

“But what investors have told us in the comments that they’ve sent us is that understanding the emissions of a company’s supply chain helps understand what’s called transition risk. You know, what might be the future of that business,” Gensler said.

Separate rules from Europe and California

The SEC’s delay hasn’t stopped other regulators from taking pollution disclosures into their own hands.

In October, California Governor Gavin Newsom signed a climate disclosure bill requiring private and public companies that do business in California to disclose scope 1, 2 and 3 emissions beginning in 2026.

California’s bill comes after Europe passed its own rule, called the Corporate Sustainability Reporting Directive. It forces certain companies that do business in Europe to publish information on environmental and social matters. That rule took effect in January 2023.

The combination of those two rules means that many large US companies will likely disclose climate emissions, with or without the SEC’s rule, Fisher said. “The mandatory reporting wave is already underway.”

A contentious proposal

The SEC’s proposed rule has elicited strong reactions – both positive and negative – from lawmakers, business leaders and academics.

Critics argue that the rule will have unintended consequences on the overall economy.

A comment submitted to the SEC by Matthew Winden, an associate dean of the University of Wisconsin Whitewater’s College of Business, argued that the cost of measuring emissions will be greater than the SEC anticipates. Companies could pass those cost increases onto customers through higher prices or onto employees through fewer raises or wage reductions, Winden argued.

Republican lawmakers have also argued that the rule is “outside the scope” of the SEC’s mission and, “if finalized in any form, will unnecessarily harm consumers, workers, and the U.S. economy,” according to a letter from three GOP members of the House.

However, the rule has drawn strong support from Democratic officials. A March letter to the SEC signed by Democratic lawmakers, including Senator Elizabeth Warren and Representative Jamie Raskin, urged the SEC to “fulfill its duty to investors and follow through on finalizing a strong climate disclosure rule without delay.”

Gensler addressed criticisms at the fireside chat, saying that though the SEC is not a climate regulator, many companies already disclose part of their climate emissions and make promises regarding emissions and waste. Investors should have a standardized way to analyze those reports, he said.

“Hundreds and hundreds of companies – 81% of the Russell 1000 (index) – are making climate disclosures, and investors are making decisions,” Gensler said. “Investors really do want some rule.”

Fisher of KPMG said the rule would help rein in companies who “write their own rubric and grade their own papers” regarding environmental promises and disclosures.