A landmark decision emerged from Washington on March 6 when the Securities and Exchange Commission (SEC) announced policies that require publicly traded companies to report their Scope 1 and 2 greenhouse gas (GHG) emissions. The rules also require these companies to explain how emissions impact business operations and costs and how they affect stakeholders.
A more than 800-page document outlines the guidelines firms must adhere to when reporting emissions. The final rule pays closer attention to Scope 1 emissions since they are the easiest to calculate.
Scope 1 emissions are generated directly from a corporation, while Scope 2 are indirect emissions from purchasing electricity or heat. Scope 3 emissions had originally been included in the legislation but were dropped after public pushback. The SEC said more than 24,000 comments and 4,500 letters were sent complaining about the Scope 3 requirement.
Photo Courtesy Securities and Exchange Commission
“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” Gary Gensler, SEC chair, said in a press release. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”
Any company (“accelerated filers”) with publicly traded shares with $75 million+ in public stock must now report its Scope 1 and 2 emissions, costs from severe weather damage, and material impacts of climate-related risks to a company business model.
The ruling passed 3–2 and is already expected to cause tensions, with Reuters reporting that 10 states plan to file a lawsuit against the SEC’s ruling. Some feel this ruling is unfair and puts unnecessary pressure on businesses to spur the energy transition. On the flip side, some climate-action groups are suing because they feel the law doesn’t do enough to enforce fraudulent emission reporting.
Photo Courtesy Marcin Jozwiak
Retailers, tech giants, and oil/gas companies are among the businesses expected to be affected by the ruling. They will also have to disclose the expected costs of moving away from fossil fuels.
The SEC estimates that around 2,800 companies will have to start reporting their emissions by 2026.
The ruling comes after California passed a similar measure. Last October, private and public companies in the Golden State with more than $500 million in revenue were required to report all Scope emissions. Scope 1 and 2 reporting must start by 2026 and Scope 3 reporting by 2027. The European Union also implemented similar laws.
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” Gensler said. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”
“Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today,” he continued. “They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements, rather than on company websites, which will help make them more reliable.”
