Beyond the Green Curtain: Unveiling the SEC’s Climate Disclosure Proposal

As the spotlight on climate change intensifies, federal agencies, including the U.S. Securities and Exchange Commission (“SEC”) and the European Commission in the European Union (“EU”), are grappling with the environmental impacts generated by companies. The SEC, traditionally tasked with creating and enforcing policies around the investment of money, has added financial climate change consequences to its list of responsibilities. (SEC). Most recently, the SEC has doled out a new proposed climate disclosure rule, intended to create consistent reporting guidelines for publicly traded companies, curb corporate greenwashing, and protect investors. (Jessica Corso, Law360; Michael Copley, NPR; SEC). While many consider the SEC’s attempt to combat climate change admirable and well-intended, opponents to the proposed rule express concerns about its impact on farmers and small businesses. (Jim Tyson, CFO Dive). 

The SEC’s proposed rule, if finalized, would require substantial climate-related disclosures by applicable reporting companies. (Jessica Corso, Law360). It would mandate most publicly-traded companies, including foreign registrants, to report greenhouse gas (“GHG”) emissions and disclose business risks associated with climate change, such as severe weather events and the costs of reducing carbon footprints. (Jessica Corso, Law360; Al Barbarino, Law360; SEC). The emission compliance requirements would be introduced gradually for companies, taking into account their size and filing status. Id. The proposed rule requires three climate-related disclosures: direct GHG emissions from sources controlled or owned by the company (“Scope 1 Disclosure”); indirect emissions linked to the procurement of energy consumed by the company (“Scope 2 Disclosure”); and emissions related to the environmental impacts of the company’s suppliers and customers (“Scope 3 Disclosure”). Id. The rule provides some flexibility around Scope 3 emission disclosures, including a safe harbor clause and an exemption for smaller reporting companies. (SEC). To ensure accurate disclosure, companies must report metrics and targets used to assess and manage relevant climate-related risks. (Al Barbarino, Law360; Persefoni).

This proposed rule marks the first climate-related disclosure under SEC Chair Gary Gensler. In fact, the proposed climate-related rule is the first of its kind. (Jarrett Renshaw, et al., Reuters). While there is debate over whether the SEC should regulate climate-related disclosures, proponents argue that doing so is crucial to creating transparency and societal understanding about companies’ harmful environmental impacts. (Jessica Corso, Law360). In April 2023, a year after the SEC first noticed the public of the proposed rule and after public concern about the SEC’s role in climate change regulation, Gensler clarified to Congress that the goal of the proposed rule is not to set federal policy on combating climate change, but rather to establish consistent environmental reporting among companies. (Jim Tyson, CFO Dive). In his testimony, Gensler stated, “[The SEC is] not a climate policy agency. [The proposed rule] is about companies that are already making [climate risk] disclosures and trying to bring some consistency to that disclosure.” Id. In addition to consistent reporting standards, Gensler aims to prevent reporting companies from misleading their investors about their environmental activities, a practice known as “greenwashing.” (Michael Copley, NPR).

The SEC’s proposed disclosure rule appears to be a breeze compared to the EU’s intricate corporate climate reporting standards. The EU’s Corporate Sustainability Reporting Directive (“CSRD”), went into effect in January 2023. (Eva Monard, et al., Law360). The CSRD requires all mid-to-large, listed companies to disclose details regarding their approach to environmental issues including biodiversity, pollution, and their impact on communities and workers. (EU; EUR-Lex; European Commission). Moreover, the CSRD directive mandates disclosure of both private and public companies with at least 500 workers. (Addisu Lashitew, Brookings). Under the CSRD, listed companies must also report the impact of extreme weather events on their business, the impact that their carbon-reduction efforts are expected to have on their bottom line, and their GHG emission metrics as well as their plans for reducing their climate footprint. Id.

Significant differences exist between the SEC’s climate change proposal and the EU’s climate reporting standards. For example, through disclosure, the SEC’s proposed rule seemingly focuses on curbing the marginal climate risks affecting reporting companies, whereas the EU reporting rules more comprehensively address broader sustainability issues, such as the societal impact of environmentally harmful business activities. Id. The SEC’s proposed rule centers on investor-focused risk governance and financial materiality, in contrast to the CSRD’s extensive standards that require reporting on community and worker impact. (European Commission; Addisu Lashitew, Brookings). Also, while the EU’s CSRD mandates disclosure only among medium-to-large, listed, public and private companies, the SEC’s proposed rule mandates disclosure among companies which are publicly traded in the United States, regardless of size. Id.  

Various groups have raised concerns about the SEC’s proposal. (Jessica Corso, Law360). The U.S. Chamber of Commerce (the “Chamber”) noted that implementing the Scope 3 emission disclosures would likely be a logistical nightmare. Id. Alongside the Chamber, ranchers, farmers, and agricultural groups have voiced objections. Id. These groups argue that submitting detailed emissions data to the public companies they intend to sell to could result in significant costs, potentially resulting in the closure of small and mid-sized farms negatively impacting local, regional, and national economies. Id.  Given that farmers and small businesses are the bedrock of the U.S. economy, there are concerns about the collateral impact the proposed rule may have on farmers and small business owners. Id. On the other hand, climate change disclosures are a necessary step for companies to assess their carbon footprint and incentivize companies to help mitigate the global effects of climate change that impact our daily lives. (Jarrett Renshaw, et al., Reuters).

The SEC’s proposal, as the first climate-related disclosure rule, has garnered notable critics. (Jim Tyson, CFO Dive). Opponents of the SEC’s proposal argue its overreaching and harmful to farmers and small entities. Id. While the novel proposal has been heavily criticized, the SEC wishes to standardize environmental reporting and curb greenwashing rather than regulate climate policy. Id. While how effective the proposed rule will be on reducing corporate environmental impacts remains unclear, corporations should assume that the rule will be finalized and immediately take proactive steps towards compliance with the final rule, such as preparing tracking measures or considering ways they can minimize their environmental impact.