US SEC adopts climate rule that may face challenges despite dilution (updated)
06/03/2024 17:02
(Adds information about lawsuit from Republican-led states,
paragraph 2, and further lawyer comment, final two paragraphs)
By Isla Binnie and Ross Kerber
March 6 (Reuters) - Wall Street's top regulatory body
voted on Wednesday to adopt a rule that would require public
companies to disclose certain climate-related risks, a
first-of-its-kind regulation that was watered down from an
earlier draft.
It drew a mixed response, with 10 Republican-led U.S. states
vowing to sue the U.S. Securities and Exchange Commission while
the top U.S. business group also threatened to sue the agency.
Several environmental groups applauded the rule but said they
had hoped for stricter requirements.
First proposed in draft form in March 2022, the SEC rule
aims to set a standard for how companies communicate with
investors about greenhouse gas emissions, weather-related risks,
and how they are preparing for the transition to a low-carbon
economy.
SEC Chair Gary Gensler, whose legacy will partly be defined
by this effort, said standardizing this information and turning
guidance into firm rules would benefit companies and investors
alike.
Gensler emphasized the SEC's role as a financial regulator,
using a stock market analogy for trading decisions.
"You could use this disclosure to go short green or long
green… it's just disclosure, we are completely neutral," he told
reporters after the vote.
The rule drops an earlier proposal to ask larger companies
to gather and report data on planet-warming emissions from
suppliers and end-users of their products, known as Scope 3
emissions, in some circumstances. Reuters first reported this
change last month.
In a further move away from the more prescriptive draft, it
also allows those larger companies to determine whether
emissions from their own operations and the power they purchase
constitute information that investors need to make decisions.
The two Republican commissioners voted against the rule
while their three Democratic counterparts voted for it.
"The Commission ventured outside of its lane and set a
precedent for using its disclosure regime as a means for driving
social change," said Republican Commissioner Mark Uyeda.
Uyeda said the rule would force companies to spend time and
money on discussing climate at the expense of "other matters
that could have greater and more immediate impacts".
IMPACTS ON BUSINESSES
The rules are part of Democratic President Joe Biden's
agenda to address climate change threats through federal
agencies and would join similar requirements in Europe and
California.
Companies will be asked to add a note to their financial
statements detailing costs stemming from severe weather events
like hurricanes and wildfires, but a proposed requirement to
split out the impacts of those costs was narrowed.
Smaller firms, which comprise the majority of U.S companies,
will be exempt from reporting their greenhouse gas emissions.
Still, the Chamber of Commerce business group, which has
filed a lawsuit against California's rules, said it may consider
legal action.
"While it appears that some of the most onerous provisions
of the initial proposed rule have been removed, this remains a
novel and complicated rule that will likely have significant
impact on businesses and their investors," senior Chamber
official Tom Quaadman said in a statement.
Leah Malone, leader of the environmental, social and
governance (ESG) and sustainability practice at law firm Simpson
Thacher & Bartlett, said the final rule reduced the burden on
companies to disclose emissions, but requires information that
will give investors an "important window" into companies'
approach to climate risk.
"Up until now, most companies that felt they had something
positive to say about their climate risk approach have included
that information in a separate sustainability report," Malone
said. Now, companies will need to "consider these issues
seriously" and be encouraged to build processes to evaluate
these risks.
Some Democratic politicians and sustainability-minded
investors were disappointed at the absence of stricter
disclosures, but differed in their views of how effective the
rule would be.
Investor group Ceres said in a statement it was "thrilled
with the SEC’s work in crafting a strong rule" although "the
regulation notably lacks a mandate for Scope 3 greenhouse gas
(GHG) emissions".
But Democratic Senator Ed Markey of Massachusetts said the
rules put the U.S. economy at risk. "It means big promises
without any real accountability to deliver emissions reductions,
despite these same entities having to provide this information
in the European Union and in California starting in 2026,"
Markey said in a statement.
If those entities captured in other jurisdictions choose to
send more information to the SEC than is required, "they're
expanding their scope of liability", said Abbey Raish, an ESG
partner at law firm Kirkland.
This is because any information thought to be erroneous
or misleading could be subject to SEC enforcement actions and
shareholder litigation in addition to liability under another
jurisdiction, she said.
(Reporting by Isla Binnie and Ross Kerber; Editing by Chizu
Nomiyama, Barbara Lewis, David Gregorio and William Maclean)
((isla.binnie@thomsonreuters.com; Reuters Messaging:
isla.binnie.thomsonreuters.com@reuters.net))