Wall Street's main regulator, the U.S. Securities and Exchange Commission, adopted rules Wednesday that will require thousands of publicly traded U.S. companies to report financial risks associated with climate change.
The final rules represent a compromise over what had become one of the most hotly debated issues the SEC has considered, and the result brought criticism and the threat of litigation from both business and environmental groups.
The SEC will require large companies to disclose their direct greenhouse gas emissions, the risks they face from climate-driven events such as extreme weather and to provide context on how the companies are managing those risks.
Many companies already provide some of that information in sustainability reports or to comply with climate disclosure rules in other countries. However, SEC Chair Gary Gensler said it was important to put climate disclosure in a more reliable form based on U.S. laws.
"The rules will provide investors with consistent, comparable, and decision-useful information," Gensler said in a statement following the Commission's 3-2 vote to adopt the rules.
SEC rules require bipartisan representation among its commissioners, and the vote followed party lines with the two Republican members voting against adoption.
In discussion Wednesday preceding the vote, Republican Commissioner Mark Uyeda called the rules "an attempt by special interests to hijack" market regulation and warned about additional costs companies would face to comply with the reporting requirements.
Democratic Commissioner Caroline Crenshaw supported the rules but bemoaned the changes from the original proposal, calling the compromise the "bare minimum" required.
The SEC originally proposed the rules in 2022 and said it had received more than 24,000 comments. The final rules were scaled back from the original proposal to address criticism from some business groups and conservative lawmakers. Most notably, the final rules do not include climate risks or emissions related to a company's supply chain, a category known as Scope 3.
"That's disappointing but not shocking," Ceres CEO and President Mindy Lubber told Newsweek.
Ceres, which works with businesses and investors on market-based solutions to climate change, had encouraged the SEC to include the supply chain emissions, which often account for most of a company's total climate impact.
In climate policy terms, greenhouse gas emissions that result directly from business activity are called Scope 1, and emissions resulting from power purchases are Scope 2. Both are straightforward in terms of a company's ability to measure and control.
Accurately monitoring the Scope 3 category, however, rests on the abilities of the outside suppliers of a company's materials and services, something Lubber acknowledged is more challenging to address.
"Measuring that and managing that is a bit more complicated," she said.
Other climate activists said the omission of Scope 3 emissions and additional loopholes leave the SEC's compromise rules too weak.
"Allowing companies to continue hiding a full accounting of their climate pollution keeps investors, including the Sierra Club and our members, in the dark," Ben Jealous, executive director of the Sierra Club, said in a statement. The Sierra Club said it is reviewing the final rules and will have more details on "potential legal actions."
The U.S. Chamber of Commerce, the world's largest business organization, said in a statement that even with the Scope 3 requirements removed, it remains concerned about the impact the rules will have.
"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," Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman said, adding that litigation against the rules is still a possibility.
An analysis of comments to the SEC conducted by Ceres suggests that the Chamber may be out of step with many of its members. Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said most original comments were in favor of the new rules.
"Eighty percent of the comments were supportive," Rothstein told Newsweek, and a review of comments from major institutional investors showed similar support, he said.
Many businesses that appear on Newsweek's rankings of the country's greenest, most trustworthy and most responsible companies commented on the SEC rules. A review of the comments shows the reach of climate impacts across business sectors. While several companies voiced concerns about the Scope 3 emissions, others urged even stronger action, and the comments demonstrate widespread agreement that companies should disclose climate-related risks and actions.
United Parcel Service, which consumes a tremendous amount of fossil fuels in its ground and air delivery service, has been disclosing its climate impacts in sustainability reports for more than 20 years, according to a company spokesperson. UPS has a goal to reach carbon neutrality by 2050 and appears on Newsweek's rankings of America's Most Trustworthy and America's Most Responsible companies.
UPS supported the SEC rules and even urged stronger action.
"We generally agree with the requirements included in the proposed rules, but recommend they go further," UPS Executive Vice President and Chief Financial Officer Brian Newman wrote. Newman had wanted the SEC to keep Scope 3 requirements and make sure they applied to all registered companies.
Fashion company Ralph Lauren, which appears on Newsweek's rankings of America's Greenest Companies and Most Responsible Companies, also used its comments to the SEC to call out the role of greenhouse gases that arise from company supply chains.
"While we recognize there are inherent challenges to accurately measuring scope 3 emissions, our value chain's contribution to our GHG footprint is too important to ignore," Ralph Lauren's Chief Global Impact Officer Katie Ioanilli wrote.
Ceres President Lubber said many companies are already disclosing climate information to comply with regulations in place in Europe, and last year California passed legislation that will require large companies that do business in the state to disclose climate risks and emissions.
Despite the business pushback that forced the SEC to scale back the proposed rules, she said, the trend still favors additional climate disclosure.
"It makes sense to their consumers, it makes sense to their employees, it makes sense to their board, and it makes sense to their investors," Lubber said. "They're not turning back."
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