US companies may be required to disclose climate risk

The US securities regulator proposed on Monday (21) to require companies listed on the country’s stock exchanges to disclose a series of risks related to climate and greenhouse gas emissions. It is part of President Joe Biden’s drive to join forces and prevent climate-related catastrophes.

The SEC (United States Securities and Exchange Commission) released its draft regulation, under which companies would disclose their own direct and indirect gas emissions, known as Scope 1 and Scope 2 emissions. It would also require companies to disclose the emissions generated by its suppliers and partners, known as Scope 3 emissions, if material.

SEC Chairman Gary Gensler said the agency is responding to investor demand for information about how climate change will affect the financial performance of the companies in which they invest.

But Republican politicians have accused the body of overstepping its legal authority, and the US Chamber of Commerce has vowed to fight parts of the proposed regulation.

The draft proposal, subject to public feedback and likely to be completed later this year, is expected to help investors get the information they are looking for while increasing the reporting burden on corporate America.

It would also require companies to disclose the “actual or likely material impacts” that climate-related risks will have on their business, strategies and outlook, including physical risks, as well as potential new rules such as a carbon tax.

emission targets or announced other plans to move away from fossil fuels would have to provide details on how and when they expect to do so.

“Companies and investors would benefit from clear rules to follow,” Gensler said.

Senator Patrick Toomey, the top Republican on the US Senate Banking Committee, criticized the rule, saying it “goes far beyond the SEC’s mission and experience.”

Progressive investors and activists have lobbied the SEC to demand disclosure of Scope 3 emissions, holding companies accountable for all the carbon dioxide and methane they help generate. Corporations have been pushing for a more limited rule that doesn’t drive up compliance costs too much.

“This proposal will be a beacon on a path to heeding President Biden’s priority of disclosing climate risk to investors and all areas of our society,” said Tracey Lewis, a policy adviser at Washington-based advocacy group Public Citizen. “There will be a lot of critics,” she added.

The SEC said the Scope 3 requirement would include cuts based on the size of a company and that all emissions disclosures would be staggered between 2023 and 2026.
It was not immediately clear how many companies would need to make Scope 3 disclosures, as they would have broad power to decide what counts as “material”.

The Chamber of Commerce, the country’s biggest business lobby, called the proposal too prescriptive and complained that it would force companies to disclose largely immaterial information at the expense of more meaningful data.

“The Supreme Court has made it clear that any disclosures required under securities laws must pass the materiality test, and we will act against provisions in this proposal that deviate from that standard,” said Tom Quaadman, executive vice president of the group, in an announcement.

The Investment Company Institute, which represents global investors, has broadly welcomed the rule.

“The broad disclosure that the proposal requires will provide investors with comparable, consistent, qualitative and quantitative information.”

legal challenges

The SEC has spent the past week defending the bill against potential legal challenges, six sources told Reuters.

Corporate groups say there is no agreed methodology for calculating Scope 3 emissions, saying this can lead to double counting, and that providing so much detail would be costly and expose companies to litigation if third-party data is wrong.

The SEC has attempted to address this concern by proposing that Scope 3 disclosures be protected by a legal safe harbor — which already exists for companies’ forward-looking statements.

Any legal challenges will likely argue that the SEC does not have the authority to require Scope 3 emissions data, which the agency’s only Republican commissioner, Hester Peirce, said when voting against the proposal.

Some experts say the SEC’s authority in this area is clear, noting that investors poured more than $649 billion into environmental, social and governance funds around the world last year and are asking better data.

Translated by Luiz Roberto M. Gonçalves