The Securities and Exchange Commission will vote Monday on whether to propose a new rule requiring public companies to report risks related to climate change and their own greenhouse gas emissions, in a move that puts the agency at the center of a debate over whether financial regulators have a role to play in protecting the U.S. economy from the effects of a warming planet.
The proposed rule would require public companies to disclose how climate-related risks will materially impact their businesses in the short or long term, how they plan to identify and manage climate risks and whether they have a transition plan in place to deal with climate change.
The new regulation would also require companies to disclose their direct or “Scope 1” greenhouse gas (GHG) emissions emitted from facilities or vehicles directly owned by the company. Additionally, companies will have to report GHG emissions that result from the purchase of electricity and other forms of energy, known as “Scope 2” emissions.
The most controversial aspect of the rule proposal relates to Scope 3 emissions, or greenhouse gases released by a company’s customers in their use of a company’s product and by a company’s suppliers in the process of creating inputs.
As proposed, the SEC’s rule would not require Scope 3 emissions disclosures unless the company has set a GHG emissions goal that includes Scope 3, or if Scope 3 emissions are “material” to the company’s financial performance. U.S. case law says that information is material if there is a substantial likelihood that a reasonable investor would think that information necessary when determining whether to buy or sell a security.
Companies will be required to have their Scope 1 and Scope 2 emissions verified by an independent authority with expertise in climate science, similar to how companies must have their financial statements audited by an independent accounting firm, though this “assurance” requirement would not apply to scope 3 emissions, according to SEC officials.
If the SEC votes to propose the rule, the public will have at least 60 days to submit comments critiquing the proposal. The comment period will end either 60 days from Monday, or 30 days after the proposal is published in the Federal Register, whichever period is longer.
Republicans have been quick to criticize the SEC for what they say is an expansion of its remit to achieve through regulations what climate activists haven’t achieved through regulation.
“Just as we wouldn’t task the EPA with auditing corporate books, financial regulation and supervision isn’t meant for advancing environmental policy,” Sen. Pat Toomey of Pennsylvania, the ranking Republican on the Senate Banking Committee, said during a hearing on climate change and the financial system last year. “The concept of materiality is the cornerstone of the disclosure-based regime under federal securities law…mandating disclosures of non-material climate-related information would undermine this concept and its important role.”
The rule proposal comes just one week after Sarah Bloom Raskin was forced to withdraw her candidacy for a spot on the Federal Reserve after Republicans on the Senate Banking Committee boycotted her confirmation vote due to concerns over her past advocacy that the central bank should not extend emergency aid programs to fossil fuel companies.