Climate Disclosure Convergence Creeps Along

Though the world may be coming together on unified climate disclosure standards for corporations, sparring over the Securities and Exchange Commission’s new reporting rules demonstrates that it’s happening at a glacially slow pace.

After an arduous codification process, the climate disclosure rules adopted by the SEC this month included many of the basic points that had been under discussion for years. Among them, publicly traded companies must disclose:

• Climate-related risks that have had or are reasonably likely to have a material impact on the company’s business strategy.
• Results of operations or financial condition.
• Measures undertaken to address climate-related risks.
• Information about the role of their boards of directors in overseeing climate-related risks.

In addition, large, accelerated filers and accelerated filers that are not exempt are required to disclose information on their Scope 1 and Scope 2 emissions.

The absence of reporting requirements for Scope 3 emissions – indirect emissions derived from supply chains and the use of companies’ products – represented a notable dilution of earlier standards proposed by the SEC. Apparently, the agency backed down on Scope 3 emissions in the face of complaints from business interests at large. The change didn’t seem to buy any goodwill with high-profile critics, though, as Republican-appointed commissioners Mark Uyeda and Hester Peirce voted against the disclosure rules. The U.S. Chamber of Commerce hinted at court challenges to the rules coming down the pike.

For those who would like to see the U.S. achieve a greater level of parity in climate-related reporting relative to international counterparts, pushback against the new rules suggests there’s still a long way to go. Approval of the SEC’s disclosure regulations has already lagged enactment of the  European Union’s Corporate Sustainability Reporting Directive (CSRD) by a little more than a year. Meanwhile, the International Sustainability Standards Board also released its own voluntary climate-related disclosure standards last year.

On the other hand, the fact that companies are already facing more stringent climate-related disclosure requirements outside the U.S. could effectively force them to provide more information absent changes to the SEC’s rules. Companies operating in the EU, for instance, must report all emissions, including Scope 3, starting in 2025 if they have more than 250 employees and/or annual revenue starting in the range of roughly $40 million. California state laws also include reporting rules for Scope 3 emissions that apply to some companies.

More likely, the SEC’s rules will need to survive legal challenges on the home front, both from states and other interested parties, including fracking companies and possibly the U.S. Chamber of Commerce, among others. Conservative states such as Oklahoma, Alabama and Wyoming are petitioning the U.S. Court of Appeals to review the disclosure rules, charging the SEC overstepped its authority in issuing them. The SEC also should prepare to go to court over the rules in some bluer states, it would seem. Two fracking companies — Liberty Energy and Nomad Proppant Services — have also already filed their own lawsuit against the regulation.

The bottom line for climate activists: Don’t celebrate anything just yet.