SEC Finalizes Climate-Related Disclosures Rules

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by | Mar 7, 2024

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The SEC has finalized rules that will enhance climate-related disclosures by public companies, particularly greenhouse gas emissions, in response to investor demands to identify climate-related risks.

However, the rule was scaled down from when it was first unveiled in March 2022 and doesn’t include Scope 3 emissions.

The final rules will overall require companies to more transparently present their contributions to climate change, as well as how their business operations may be affected by it. The first rules, specifically, include requirements to disclose climate-related risks that have or will have a material impact on the business as well as descriptions of activities a company has taken to address climate impacts.

Further, companies will have to reveal what they have done to plan for potential climate risks. They will report on any oversight of climate-related risks by their board of directors and will have to reveal any processes the company has taken on in order to identify and manage those risks. Additional rules were also adopted, such as disclosing losses incurred due to severe weather events, use of carbon offsets, and more.

According to a recent report from The Hill, the new ruling was considerably scaled back from the original proposal in 2022 as it only requires large and mid-sized companies to report. Plus, such companies will only be required to report on emissions stemming from electricity a company uses. Not included is accountability for emissions generated by products sold, such as having oil companies report emissions caused when their product is burned for fuel.

The outlined emissions rules will reportedly begin for companies’ fiscal years starting in 2026 and 2028, respectively.

Rules Attempt to Address Investor Distrust of Corporate Sustainability Claims

Investors have shown significantly increased interest in sustainability in recent years, especially as climate change continues to impact nearly all aspects of business operations.

According to a PwC survey conducted at the end of last year, 94% of investors believe that corporate reporting on sustainability performance contains at least some unsupported claims. The large majority of investors also admitted that consideration of how a company manages sustainability-related risks and opportunities is a key factor for their investment decisions.

The new ruling will allow investors to make side-by-side comparisons between major public companies, specifically based on climate impacts. Not only will this aid investors in better understanding the scope of a given corporation’s sustainability efforts, it may also require companies that currently lag behind to step up their climate goals.

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