The Securities and Exchange Commission plans to require all publicly traded companies to disclose their greenhouse gas emissions and the climate risks their businesses face, part of the Biden administration’s broader push to force the private sector to reckon with the dangers of a warming world.
The new rule could transform the SEC into one of the country’s leading enforcers of climate-related disclosures, a role in which some critics say the Wall Street regulator lacks expertise and authority.
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.
Climate change is already threatening infrastructure in the rapidly warming Arctic, where melting permafrost puts key pipelines and roads at risk. Rising global temperatures have also increased the frequency of fires, floods, hurricanes and other weather disasters, which cost more than $145 billion in 2021, according to the National Oceanic and Atmospheric Administration.
At the same time, environmentalists say that the shift to a low-carbon economy poses “transition risks” to companies dependent on fossil fuels. As governments around the world adopt policies aimed at reducing carbon emissions and boosting renewable energy, businesses with significant investments in fossil fuels could wind up with stranded assets.
“These disclosure rules are critical to ensuring that Wall Street cannot continue to get away with making investments that exacerbate the climate crisis,” Sen. Elizabeth Warren (D-Mass.) said in an emailed statement. “The American people and financial investors have a right to know the risks of these investments, and it’s taken far too long for the SEC to take action.”
While many firms already voluntarily share some details about their environmental impact, there are sometimes wide discrepancies in how companies calculate carbon emissions, said Danielle Fugere, president and chief counsel of shareholder advocacy group As You Sow.
For example, Coca-Cola counts up total emissions generated by its facilities, suppliers and customers in making and consuming its products. Tesla, which touts its zero-emission electric vehicles, shares only the emissions generated in creating a single line of cars, the Model 3, explaining in its most recent impact report that this is “a good proxy for understanding the emissions impact of our vehicle business.”
A spokesman for Coca-Cola declined to comment. Tesla did not respond to requests for comment.
Under SEC Chairman Gary Gensler, the commission has debated whether to require companies to follow Coca-Cola’s example in disclosing all emissions produced by their suppliers and customers, according to the people briefed on the discussions.
But because this broader set of data can be much harder to calculate, the commissioners have considered phasing in this requirement in the future and possibly limiting it to only the largest firms, one of the people said. Gensler acknowledged this possibility when testifying before the House Financial Services Committee in October.
Business groups have opposed the federal government mandating any environmental disclosures. The U.S. Chamber of Commerce, the nation’s largest business lobbying group, has argued that because environmental data is “inherently uncertain,” businesses should not be forced to include it in their annual updates to investors — for which they can be held legally liable.
“If that information goes into an SEC filing, that’s where companies can get sued,” said Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness.
Some Republicans, meanwhile, have urged the Biden administration to pause its work on climate-related financial regulations amid the energy crisis prompted by Russia’s invasion of Ukraine. In a recent letter to Treasury Secretary Janet L. Yellen, Republicans on the Senate Banking Committee wrote that the SEC and other federal financial regulators should hold off on issuing rules that “may discourage future energy production.”
Setting and enforcing rules about climate change disclosures could pose challenges for the SEC, which has little background on environmental issues, said Keith F. Higgins, a former director of the SEC division that oversees corporate disclosures.
“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,” said Higgins, who served as head of the regulator’s corporation finance division from 2013 to 2017.
The SEC’s proposed rule will go through a public comment period before a final rule is voted on by the agency’s four commissioners — three Democrats and one Republican. The regulation is likely to face legal challenges on the basis of whether the commission has the authority to tackle climate issues, said Kathleen Sgamma, head of the oil and gas industry group Western Energy Alliance.
A year ago, West Virginia Attorney General Patrick Morrisey threatened to sue the agency if it forced companies to disclose environmental data, arguing in a letter to the SEC 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, 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.”
An SEC spokesman declined to comment for this article.
The Biden administration has increasingly urged the private sector to grapple with the risks of rising temperatures. The administration released a report in the fall warning that climate change poses an emerging threat to the stability of the U.S. financial system and urging bank regulators to take steps to mitigate that threat.
President Biden has also nominated Sarah Bloom Raskin, a vocal advocate for addressing climate-related risks, to be the Federal Reserve’s top banking cop. But her nomination appears doomed after Sen. Joe Manchin III (D-W.Va.) this week said he opposed her because of her stance on energy policy amid rising inflation.
The SEC dipped its toe into climate policy in 2010, when it formally issued guidance that companies should share information about climate change when it poses a “material” risk to their business. Shareholders at public companies complained that firms interpreted this guidance in widely different ways, with some publishing lengthy sustainability reports outlining their climate impacts and others ignoring the topic completely.
When Gensler was sworn in as SEC chairman last year, he signaled that he wanted the agency to bring more “consistency and comparability” to climate disclosures. During a request for public comments on a possible climate rule, Gensler said, the agency received more than 500 comments, of which three-quarters were in favor of some type of mandatory climate disclosure.
Among large businesses, both Delta and Walmart have voiced support for mandatory climate disclosures, with the airline saying it had already spent “thousands of hours” collecting data on “environmental, social and governance” criteria for its annual report to shareholders.
“It’s not like this is progressive organizations against the entire world. There are businesses that understand that this is something that’s going to happen,” said Tracey Lewis, policy counsel for Public Citizen’s climate program.
Randy Hargrove, a spokesman for Walmart, said the retailer is “supportive of more robust ESG disclosures,” although he added that the company is waiting to see the text of the proposed rule before taking a formal position on it. Delta declined to comment.
The SEC rule is likely to follow many of the standards already set by the Task Force on Climate-Related Financial Disclosures, according to one of the people briefed on the SEC’s discussions. The task force was established in 2015 to advocate for greater disclosure of climate-related risks to investors and insurers and is chaired by former New York mayor Mike Bloomberg.
The United States trails other countries that have already proposed climate disclosure mandates in line with the task force’s standards. Britain and Japan plan to require certain large businesses to disclose their emissions starting in April, while the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024.
Some American business groups have pushed for the SEC rule to exclude “scope 3” emissions, those generated by suppliers and customers, such as drivers filling up their cars with gasoline. However, climate activists argue that the rule will lack teeth if it omits scope 3 emissions, which make up roughly 85 percent of ExxonMobil’s carbon footprint, according to Carbon Tracker Initiative, an environmental group that advises institutional investors.
“If the SEC makes the ill-advised decision not to include scope 3, they would be missing a huge opportunity to actually provide investors with the information that they want and need,” said Lena Moffitt, campaigns director for Evergreen Action, a climate advocacy group.
Big financial institutions such as BlackRock, the world’s largest asset manager, have called for the SEC to phase in requirements to report the scope 3 emissions they finance. The push comes after BlackRock chief executive Larry Fink warned in January that businesses are not the “climate police.”
BlackRock declined to comment for this article.