The United States wants to make it a legal requirement for businesses to disclose their greenhouse gas (GHG) emissions.
The U.S. Securities and Exchange Commission (SEC) recently voted three-to-one to propose regulations requiring businesses to disclose their GHG emissions.
Under the rules, companies will be required to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition. companies must also explain to investors how climate-related risks can affect the business finances.
Those potential risks include the rising frequency of severe weather, the potential costs of transitioning from fossil fuels, and a company’s own efforts to limit its carbon footprint. Companies will calculate these potential costs from data they already compile for regular disclosures to investors and will need to provide certain climate-related financial statement metrics as part of their audited financial statements.
The requirement would include disclosure of GHG emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. The regulations categorize GHGs into three categories. Scope 1 emissions are the amount of GHG emissions directly produced through their own business operations, such as manufacturing; while Scope 2 emissions encompass the energy, such as electricity, they purchase to keep their business running.
In addition, some companies must report their Scope 3 emissions, which include emissions from the goods and services they purchased, but will not face penalties if that latter category of emissions has mistakes or miscalculations. Only companies that have set up Scope 3 emissions reduction goals or consider these emissions to be part of their material would be required to disclose these emissions, according to Axios. Critics believe these could allow companies to avoid disclosing Scope 3 emissions, which can often be the largest share of a company’s climate footprint.
For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions,” said SEC Chair Gary Gensler. “Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release.”
The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.
