WASHINGTON _ The Securities and Exchange Commission on Monday unveiled a landmark proposal to require all publicly traded companies to disclose their greenhouse gas emissions and the risks they face from climate change.
The proposed rule from the Wall Street regulator mandates that hundreds of businesses report their planet-warming emissions in a standardized way for the first time. It reflects the Biden administration’s broader push to confront the dangers that climate change poses to the financial system and the nation’s economic stability.
Environmentalists hailed the rule as a crucial first step in forcing the private sector to confront the economic risks of a warming world, even as some said the SEC should have gone further in requiring businesses to disclose the emissions generated by their supply chain and customers.
Some conservatives and business groups have opposed the federal government mandating any climate disclosures, and observers expect them to challenge the SEC proposal in court.
Here are answers to some common questions about the proposal:
What exactly does the rule say?
Under the proposed rule, all publicly traded companies would have to disclose their climate-related risks in their financial reports to the SEC and explain how those risks will likely impact their business and strategy, according to a fact sheet from the commission.
All firms would be required to share the emissions they generate at their own facilities, and larger businesses would need to have these numbers vetted by an independent auditing firm, the SEC said. If the indirect emissions produced by a company’s suppliers and customers are “material” to investors or included in the company’s climate targets, the SEC said those emissions must be disclosed as well.
For companies that have made public pledges to reduce their carbon footprint, the SEC said it will require them to detail how they intend to meet their goal and to share any relevant data. Companies also would need to disclose their reliance on carbon offsets, which some climate activists view with skepticism, to meet their emissions reduction goals.
If a company uses an internal price on carbon, it would need to share information about the price and how it is set. In 2019, ExxonMobil prevailed in a high-profile lawsuit alleging that the oil giant misled investors by using two different estimates — one public, one private — of the future costs of climate change.
How big of a change will this be for most companies?
Many businesses already include their greenhouse gas emissions in their annual sustainability reports and updates to investors. But there are sometimes wide discrepancies between companies, even among competitors.
For example, Ford Motor shares the total emissions generated by all of its vehicles, including the emissions from their production in factories and their fuel usage on the roads. But Tesla, which touts its zero-emission electric vehicles, shares only the emissions generated in creating a single line of cars, the Model 3. The company explained in its most recent impact report that this is “a good proxy for understanding the emissions impact of our vehicle business.”
The proposed rule closely follows many of the standards set by the Task Force on Climate-Related Financial Disclosures, a group established by former New York mayor Mike Bloomberg in 2015 to advocate for greater disclosure of climate-related risks to investors and insurers.
“Investors have driven the demand for this information. But it needs to be consistent and comparable across the globe,” Mary Schapiro, the head of the Task Force on Climate-Related Disclosures, said in an interview before the rule’s release.
“And there are lots of companies that won’t do it unless it’s mandatory,” said Schapiro, who served as chair of the SEC from 2009 to 2012 under President Barack Obama.
What will this data be used for?
Shareholders of public companies are increasingly demanding more information about the risks that climate change could pose to their investments, arguing that mounting climate disasters and environmental regulations could limit the growth of businesses that do not prepare for them.
With more hard data available, climate risks will become more central to the decision-making of portfolio managers at some of the largest investment firms, said Timothy Smith, a senior adviser at Boston Walden Trust, which manages more than $14 billion in assets. “I need a common set of data to help make an informed investment decision,” Smith said.
The new disclosures could also reveal which companies lag their industries in cutting carbon emissions, leaving them more vulnerable to pressure campaigns from investors and the public. Armed with verified data about a company’s lack of environmental progress, shareholders will be more likely to act on their concerns and vote to remove members of the board or management, Smith said.
How will the SEC enforce it?
The rule could transform the SEC into one of the nation’s leading enforcers of climate-related disclosures. While environmentalists say the SEC is well-suited for this role, some experts question whether the Wall Street regulator has the necessary expertise on climate issues.
Michael Panfil, lead counsel and director of climate risk strategies at the Environmental Defense Fund, noted that the SEC already requires companies to disclose a range of information that poses a “material” risk to their business. When the SEC feels that a firm has not adequately disclosed this information, it typically sends a letter asking for more details and clarification. The agency could send similar letters to companies that it suspects are misreporting their greenhouse gas emissions, Panfil said.
But Keith Higgins, a former director of the SEC division that oversees corporate disclosures, said that enforcing rules about climate disclosures could pose challenges for agency staffers, who have little experience with environmental issues.
“When you get into a lot of detail about greenhouse gas emissions and what types of disclosures are material to investors, I’m not convinced the SEC is the place where that expertise resides,” Higgins said in an interview before the rule was proposed.
When will the rule take effect?
The public will have 60 days to submit comments after the proposed rule is published on the SEC’s website. The agency will take those comments into consideration before issuing a final rule, which will be voted on by the SEC’s four commissioners — three Democrats and one Republican. Experts said this process could take several months.
In its fact sheet, the SEC said the new requirements would be phased in over several years. The largest companies would need to start disclosing climate risks in fiscal 2023, while other firms would have until fiscal 2024. Companies will get an extra year beyond those dates to include supplier and customer emissions, and to get emissions data audited.
Could this be challenged in court?
West Virginia Attorney General Patrick Morrisey (R) last year threatened to sue the SEC if it forced companies to disclose environmental data, arguing in a letter that its proposal would not hold up to the “strict scrutiny test,” which says laws and regulations must meet a “compelling government interest” to be constitutional.
In an emailed statement last week, Morrisey said his office remains “very concerned about this issue and we’ll review the SEC’s proposal closely as we consider potential next steps.”
Business groups may also challenge whether the SEC has the authority to wade into environmental issues, said Kathleen Sgamma, head of the oil and gas industry group Western Energy Alliance. Because many climate risks are decades into the future and difficult to predict, they are not material concerns for today’s investors and therefore not something the SEC has a mandate to regulate, Sgamma said in an interview last week.
What are other countries doing?
The United States trails other countries that have already proposed climate disclosure rules in line with the Task Force on Climate-Related Financial Disclosures’ recommendations.
Britain and Japan plan to require certain large businesses to disclose their emissions starting next month, while the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024.
Schapiro, the former SEC chair, noted that Brazil, Hong Kong, New Zealand, Singapore and Switzerland also require, or are in the process of requiring, mandatory climate risk reporting.
“Europe in particular has been far ahead because [climate] issues there were accepted as real financial risk long before that became really accepted in the U.S.,” she said.