Landmark rule requires some companies to share how much they pollute. But it was scaled back

(CNN) — Regulators on Wednesday passed a rule requiring companies to share how much they pollute. But, after two years of backlash, the final rule was significantly watered down from its original version.

Some business leaders and lawmakers said the rule overstepped; climate activists argued it didn’t do enough. The version the Securities and Exchange Commission passed won’t require companies to include some of the secondary climate effects of their products.

On Wednesday, SEC chairman Gary Gensler said he thought the finalized rules would “produce more useful information to investors. Far more useful, I think, than what they get today.”

Parts of the rule will take effect in 2025 and it comes amid a push by the Biden administration to tackle climate change.

“This was a widely expected political compromise in an election year,” Shivaram Rajgopal, a professor of accounting and auditing at Columbia Business School said.

Some emission requirements are absent from the final rule

The newly adopted rule dropped one of the most contentious elements of the SEC’s initial March 2022 proposal, requiring companies to disclose emissions they are indirectly responsible for, called scope 3 emissions. Scope 3 emissions from an oil company, for example, might be the thousands of metric tons of carbon dioxide produced by gas-powered vehicles, even though oil companies do not produce cars.

Critics have argued that tracking those emissions would be overly expensive and difficult for companies.

Instead, the finalized rule requires large public companies to disclose the direct and indirect greenhouse gas pollution they deem material, meaning important enough to share with investors. Examples of the required emissions disclosures, called scope 1 and scope 2, include waste produced by a manufacturing process or the amount of air conditioning used in an office building.

The new rules also require companies to share physical risks posed by climate change, including the threat of rising natural disasters like wildfires or hurricanes.

A controversial proposal

Gensler has faced accusations of caving to business interests and Republican lawmakers by dropping some emissions requirements.

“There is unfortunately a glaring problem with some of what I think are the political compromises that appear to have been made here, and that problem arises from the failure to adequately provide for the single most important data point that investors use and have been very clear they need which is greenhouse gas emissions data,” former acting chair and SEC commissioner Allison Herren Lee said on Wednesday.

“To me, it’s like asking for a description of the portion of the iceberg that’s visible above the water when we all know that the real danger is what lurks below,” she added.

On Wednesday, Gensler said scope 3 emissions were dropped “based upon public feedback,” noting that the agency has received 24,000 public comments since releasing the rule’s initial proposal in 2022.

But even as some companies are concerned with the costs of tracking emissions, investors seem to welcome the new rules. According to a survey of 103 institutional investors by Workiva, a reporting compliance company, 91% believe new climate disclosure regulations will help them make more informed investments.

Still, the SEC’s rule has been criticized by some groups who say it doesn’t go far enough.

The Sierra Club, an environmental organization that pushes financial institutions to reduce investments in fossil fuels, called the rule a “positive step,” albeit one that “falls significantly short of what’s needed.”

On Wednesday, Gensler said that the SEC has “no role” regarding climate risk and that the rule is focused on providing accurate disclosures for investors.

Critics say the rule still goes too far

Opponents of the rule say that even the new watered-down version is an overstep for the SEC, however.

On Wednesday, nine Republican state attorneys general, led by West Virginia attorney general Patrick Morrisey, filed a legal challenge to the new regulations.

“While the administration and the SEC has made some changes to the proposed rule, what they’ve released today is still wildly in defect and illegal and unconstitutional,” Morrisey said in a press conference announcing the filing. “We believe that we’re going to proceed in court and prevail.”

Other Republican lawmakers voiced their criticism with the SEC on Wednesday, as well. South Carolina Sen. Tim Scott, the ranking member of the Senate Finance Committee, called the rule “federal overreach at its worst,” in a statement Wednesday.

“Ignoring the concerns of Americans, small business owners, and stakeholders from across the country, Chair Gensler pressed forward with a final rule that falls outside his agency’s authority and does far more to advance the Biden administration’s far-Left climate agenda than uphold the SEC’s mandate,” Scott said.

Hester Pierce, an SEC commissioner who voted “no” on the rule, argued that the agency is underestimating the financial burden that tracking emissions and climate risk will pose for public companies.

“At a time when few companies are choosing to go public, why would we add so substantially to the price tag?” she said.

Separate rules require more emission disclosures

American multinational companies in Europe and California will likely have to report scope 3 emissions, even without the SEC’s rule.

The SEC rules “set a relatively low bar in comparison to other widely accepted climate disclosure requirements,” said Steve Soter, a vice president and accountant at Workiva.

In October, California Governor Gavin Newsom signed a climate disclosure bill requiring private and public companies that do business in California to disclose scope 1, 2 and 3 emissions beginning in 2026.

California’s bill comes after Europe passed its own rule, called the Corporate Sustainability Reporting Directive. It forces certain companies that do business in Europe to publish information on environmental and social matters. That rule took effect in January 2023.

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