Corporate America notched a major victory Wednesday when the Securities and Exchange Commission scaled back its landmark climate disclosure rule.
Public companies still will have to ramp up their attention to climate change, and under the rule, an estimated 7,000 U.S. businesses for the first time could have to divulge new information including losses that result from climate-juiced disasters and, in some cases, their planet-warming emissions.
But critics say the final regulation gives too much discretion to companies over what information they ultimately will report and could result in incomplete climate disclosures.
“That’s the most distressing part, in many ways, of where they landed here,” Allison Herren Lee, a former SEC commissioner who has long championed the effort, told E&E News.
The regulation approved Wednesday by the SEC looks dramatically different from the version the agency first proposed almost two years ago.
As expected, the agency dropped a polarizing requirement that companies disclose the greenhouse gas emissions associated with their customers and sprawling supply chains, also known as Scope 3.
But also notable is that the SEC draped much of the final rule in language that says businesses only need to report certain information if they determine it would be important — or financially material — to their investors. That includes the emissions that result from companies’ operations and energy use, also known as Scope 1 and Scope 2.
To SEC Chair Gary Gensler and others, the move hews to traditional SEC rulemaking. They say it could reduce work for companies while also ensuring investors only get information they actually need.
“Consistent with this agency’s disclosure rules over the decades, today’s final rules are grounded in materiality,” Gensler said Wednesday.
Heather Palmer, a partner at Sidley Austin who advises companies on climate-related disclosure, echoed that point.
Some companies “were concerned about having just a blanket requirement that wasn’t tied to any kind of concept of what’s material,” Palmer said. “I think that will be a welcome development compared to the proposed rules.”
But others argue that sprinkling materiality qualifiers throughout the rule was among the SEC’s most consequential changes.
“Because the company holds all of the information and makes the determination in the first instance whether to disclose something, it almost always works to their benefit, and often it’s difficult to tell what they’re not disclosing or if it would be material,” said Alexandra Thornton, senior director of financial regulation at the left-leaning Center for American Progress.
As finalized, the rule requires companies to include in official SEC filings any material climate-related risks they face, the “actual and potential” material impacts of those risks, as well as information about climate goals and targets that could have a material impact on the company’s business.
Companies also will have to disclose their use of internal carbon prices, if that carbon price is material to how it handles climate risks.
Perhaps most importantly, the materiality standard also was applied to larger companies’ disclosure of emissions associated with their operations and energy use. The proposed rule, on the other hand, would have required all companies — regardless of materiality — to calculate and report that information.
“When you limit reporting to … items that are financially material to investors, that, we think, reduces the value of the rule. It also diverges from an emerging global consensus which doesn’t merely consider financial materiality, but also considers impact materiality,“ said David Wei, managing director of climate and nature at Business for Social Responsibility, a nonprofit.
But Wei and others noted that many companies already are working to provide their investors with more climate-related information. And he said the new requirements — in combination with rules in California, Europe and elsewhere — would have the effect of a “net reduction in greenwashing.”
Kristina Wyatt, a former senior counsel for climate and environmental, social and governance at the SEC, agreed and said materiality qualifiers are common in SEC rules and that companies are familiar with them.
“If companies decide not to include it in their [SEC filings], then that does operate to the detriment of investors. But investors will largely be able to get it elsewhere, it just won’t be consolidated into one disclosure document,” said Wyatt, who is now chief sustainability officer of Persefoni, a carbon accounting software company.
The SEC’s treatment of materiality in the final rule is one of many issues that companies, attorneys and investors will have to untangle in the coming weeks.
“The materiality question is the question here,” said David Oliwenstein, a former senior counsel at the SEC who now advises public companies on securities regulation as a partner with Pillsbury Winthrop Shaw Pittman.
“It adds to the uncertainty,” he added. “Whenever you’re employing a materiality standard and leaving it up to management judgment, different companies are going to reach different conclusions on very similar sets of facts.”
Lee, the former SEC commissioner, said there’s another risk, too.
She said the materiality standard has the potential to dissuade companies that already calculate and voluntarily report their Scope 1 and 2 emissions from doing so.
Companies could just say, “I know we’ve been producing this data, but I have to stop now because the SEC says only do it if it’s material, and it’s not,” Lee said. “So they run the risk of actually dialing back on the transparency that’s already voluntarily in the market.”
