SEC’s Climate Disclosure Rule Omits Key Risks, Fails Investors and the Public

Today, the US Securities and Exchange Commission (SEC) released its long-awaited climate disclosure rule, falling short of the robust standards that investors need and that the agency has the authority and responsibility to set.

SEC Chair Gary Gensler had initially promised a rule that would provide investors with “consistent, comparable, and decision-useful information.” However, the regulation dramatically scales back on these commitments, notably by failing to require companies to disclose greenhouse gas emissions across their value chains, including upstream and downstream emissions (“scope 3 emissions”), which typically represent the majority of a corporation’s carbon footprint. The rule also requires only limited disclosures of scopes 1 and 2 emissions (emissions from companies’ operations and energy use), without making them mandatory.

The rule issued today puts the US behind global counterparts — such as the European Union, Canada, and Japan — and lags behind standards set in California, widening the regulatory divide and potentially disadvantaging US companies in the global market. It leaves investors, particularly those planning for retirement, vulnerable to undisclosed risks and misinformation, as full emissions disclosure is critical for evaluating a company’s climate risk exposure.

Charles Slidders, Senior Attorney, Financial Strategies at the Center for International Environmental Law, released the following statement:

“The SEC’s decision to bow to industry pressure against comprehensive climate disclosure requirements is a disservice to both the planet and investors. In an era of urgent need for more sustainable practices, greater transparency, and reliable information on corporate climate impacts and risks, the lack of ambition reflected in this rule represents a step backward that could ultimately undermine efforts to mitigate climate change and protect investors’ interests.

“The SEC’s approach also represents an abdication of the agency’s authority and responsibility to address significant financial risks. Climate change unquestionably poses such risks.
“The SEC’s rule excludes the climate risk factors arguably most useful to investors and significantly weakens the draft proposal made in 2022, which aimed at safeguarding investors against the existing patchwork of unreliable, incomplete, and greenwashed corporate reporting on climate-related financial risks and opportunities.
“This rule will enable companies to obscure a major portion — in some cases nearly all — of their climate impacts through their value chains. It threatens to give a veneer of legitimacy to woefully inadequate corporate reporting on climate impacts and risks.
“The divergence between US disclosure regulation and that of our trading partners creates an information gap and leaves US companies at a competitive disadvantage. This information gap will create investor uncertainty about the climate risk US companies face, deterring investment, increasing the cost of capital, and ultimately putting them on the back foot compared to foreign companies that are required to disclose material scope 3 emissions.”

Note to editors:

Disclosure of all emissions — scopes 1, 2, and 3 — is important for investors to assess the value of a company, its exposure to climate risks (including future climate change mitigation policies), and its transition to net zero. Scope 3 emissions usually account for more than 70 percent of a business’s carbon footprint and are often the majority of a corporation’s emissions (and up to 90 percent of oil and gas companies’ emissions).

Scope 3 emission disclosures are therefore of fundamental importance to investors determining the climate impact of specific businesses and how climate change may impact businesses’ long-term financial sustainability.

Today’s rule does not require scope 3 emission disclosures and requires only limited scopes 1 and 2 disclosures, without making them mandatory. A “Climate Risk Disclosure Rule” that only requires companies to disclose a small and partial subset of emissions is not a “Climate Risk Disclosure Rule.”