US Climate Disclosure Rules: Not Perfect But Still A Victory
María Mendiluce
This article first appeared in Forbes, as part of Maria’s regular series.
This week the US Securities and Exchange Commission voted, nearly two years after the initial proposal, to adopt the country’s first federal-level rules that will require public companies to disclose information on their climate-related risks and greenhouse gas emissions.
Roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the US will have to report information related to their emissions.
Climate campaigners immediately criticized the rules as being too weak, accusing the SEC of pandering to industry and Republican demands. However, while true the rules could have been stronger, the compromises were largely an attempt to protect the legislation from reversal and it is, nonetheless, a massive step forward.
Since the SEC published its draft climate disclosure rules in March 2022, they have faced intense lobbying from Republican politicians and business organizations, insisting that they would damage US companies by being too burdensome. The most notable outcome of this pushback is the omission of Scope 3 emissions in the final law.
Environmental groups have picked on this, and other parts of the rules that have been weakened, to suggest they may even go so far as suing the SEC.
“The SEC’s decision to bow to industry pressure against comprehensive climate disclosure requirements is a disservice to both the planet and investors,” said Charles Slidders, senior attorney for financial strategies at the Center for International Environmental Law, summarizing the response of many organizations.
The rules are not perfect. The absence of Scope 3 emissions is disappointing, if predictable, especially as other jurisdictions, such as Europe and, closer to home, the state of California, have included Scope 3 emissions in their disclosure legislation.
However, rather than focusing on what is missing, we should focus on what has been achieved, and the rules are a good start. Only a couple of years ago, few would have believed the US capable of passing climate disclosure laws in any shape or form.
Clear rules for companies and comparable information for investors on climate-related risks are critical components of well-functioning capital markets and the rules adopted this week will improve the transparency so sought by businesses and investors.
And while the SEC rules may not be as ambitious as, for example, the EU’s Corporate Sustainability Reporting Directive, it is positive that they are fairly close in definition to the International Sustainability Standards Board’s disclosure standards, which are being adopted by a variety of countries including Australia, Brazil, Canada, Hong Kong, Japan, Kenya, Nigeria, Mexico, Philippines, Singapore, Turkey and the UK.
The agreement by the SEC will therefore enhance global comparability, which will, in turn, help level the playing field for individual companies and make it better and easier for investors to make informed risk-based analyses. The SEC rules have maintained the need for externally assured reporting, guaranteeing vital credibility, just as the continuing disclosure requirements on financial risks in line with the Taskforce on Climate-Related Disclosures also contribute to reporting being useful and actionable for investors.
Companies covered by the new SEC rules can also benefit from many existing tools and guidelines. For instance, the SME Climate Hub reporting tools that enable committed SMEs to report on their emissions, or the greenhouse gas accounting guidelines which were published in 2023 to provide companies with the tools needed to make good quality emission reporting.
Forward-looking companies can continue to voluntarily report on Scope 3 emissions as they understand how useful this information is for their stakeholders. These companies also understand that they benefit from the analysis necessary for disclosure of such information as it helps them to identify climate-related risks and build resilience in their own supply chains.
They could also consider using supplier cascade principles as a way to get more visibility into their scope 3 impacts. Under such an approach, organizations create tangible climate action by asking Tier 1 suppliers to make a credible net zero commitment aligned with science, publicly report their progress against targets, and cascade the approach to their own Tier 1 suppliers and beyond. The idea is to create a domino effect of climate action as each subsequent tier of the supply chain asks its own Tier 1 suppliers to take action.
There is no doubt that if the US is serious about climate action it will, at some stage, have to increase the ambition of these rules and bring Scope 3 emissions in scope. However, with a polarized political scene and in a country that often prefers to solve problems through market measures rather than legislation, the new climate disclosure rules are an event worth celebrating.