“A significant turning point for the future of corporate climate change reporting” as US Securities and Exchange Commission announces new rules

On Monday 21 March 2022, the US Securities and Exchange Commission (SEC) issued a statement[1] that it had passed a 3-1 vote in favour of a proposed change of rule to US corporate climate change disclosures. If successful, the changes would start to be phased in from 2023 for the largest businesses.  

The SEC’s proposed rule change requires mandatory climate change disclosures from registrants (which includes non-US as well as US companies), “marking a significant turning point”[2] from the existing voluntary disclosure regime and providing the first clear position on climate disclosures at regulatory level since the SEC issued guidance in February 2010.[3] 

Registrants would be required to disclose Scope 1 (direct greenhouse gas (GHG) emissions) and Scope 2 (emissions from purchase energy) emissions in their registration statements and annual reports. They would also be required to disclose their Scope 3 emissions, being upstream and downstream emissions from their supply chain, if material, or if they have set a GHG target that includes Scope 3.[4] This is notable as Scope 3 emissions can often contribute the largest proportion of a businesses’ total emissions, but are often the hardest aspect to measure.

Commentary

Historically the US has been slower to address climate change issues than others, notably never ratifying the 1992 Kyoto Protocol and formally withdrawing from the Paris Agreement in November 2020 (although later rejoining). While the dissenting vote cast by SEC Commissioner Hester M. Pierce demonstrates that resistance remains in the US, there is also evidence of a growing momentum towards climate-linked considerations. Between 2018 and 2019, for example, the number of Russell 1000 companies who voluntarily published sustainability reports increased by 5%, totalling 65% in 2019.[5] This growing momentum amongst investors is central to the SEC’s argument that the proposed rule change would meet public interest pressures.

However, this proposal is likely to be met with resistance, potentially prompting challenges based on arguments around the scope of the SEC’s remit, and the increased cost and complexity mandatory disclosures may impose.

Applicability

Since this proposed rule change emanates from the SEC, rather than as law, its net will also catch non-US companies who register an offering of securities with the SEC. This may not cause great issues for EU and UK companies who are already subject to disclosure requirements, but it is particularly important to be aware that the proposed rule change may impose mandatory climate reporting on businesses in jurisdictions who are not currently subject to this.

The proposals are open to public comments until at least 21 May 2022, after which the SEC will look to make any amendments before advancing the proposal to a second vote.

[1] SEC.gov | SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors

[2] Mary Schapiro, secretariat for the Taskforce on Climate-related Financial Disclosures (TCFD) A turning point for corporate climate disclosures | Financial Times (ft.com)

[3] Interpretation: Commission Guidance Regarding Disclosure Related to Climate Change (sec.gov)

[4] Proposed rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors (sec.gov)

[5] 2020 Russell 1000 Flash Report (ga-institute.com)