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SEC Adopts Weakened Climate Disclosure Rule

SEC Adopts Weakened Climate Disclosure Rule. SEC, Securities and Exchange Commission, climate, climate-related risks, disclosure requirements, greenhouse gases, indirect emissions, oil, coal

In a 3-2 vote, the U.S. Securities and Exchange Commission adopted its long-anticipated rules designed to enhance and standardize climate-related disclosures by public companies and in public offerings. The commission dropped the most contentious provision that was fiercely opposed by many trade groups.

The final rules reflect what the SEC describes as its efforts to respond to “investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks,” such as greenhouse-gas emissions, on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” said Gary Gensler, SEC chair. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”

Before adopting the final rules, the SEC considered more than 24,000 comment letters in response to the rules’ proposing release issued in March 2022.

The original proposal included language to require companies to report indirect emissions – including from its supply chains and customers’ use of its products – such as coal or crude oil. This provision was heavily criticized by corporations and business groups as being complex and overly burdensome.

Ultimately, although companies will generally be required to report Scope 1 emissions directly from operations and Scope 2 emissions from energy purchases, they will not be responsible for Scope 3 indirect emissions, as classified by the Environmental Protection Agency. The EPA says approximately 70% of greenhouse gases produced by businesses fall into Scope 3.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today…” added Gensler.

Highlights of the final rules a registrant will be required to disclose include:

  • Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
  • The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
  • If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred, and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
  • Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
  • Any oversight by the board of directors and any role by management in assessing and managing the registrant’s material climate-related risks;
  • Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition;
  • The capitalized costs, expenditures expensed, charges, and losses incurred because of severe weather events and other natural conditions, as defined in the final rules; and
  • The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements.

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