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US regulators approve significantly scaled back climate disclosure rule
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US regulators approve significantly scaled back climate disclosure rule

American regulators have decided that big, publicly traded businesses must reveal details about climate change to shareholders. However, the regulation’s extent has been greatly reduced compared to its initial proposed version.

In a 3-2 decision, the Securities and Exchange Commission (SEC) has approved a highly anticipated rule that is the first of its kind in the United States. This nationwide mandate requires corporations to disclose their impact on climate change, giving investors greater insight into the potential risks and contributions to the ongoing crisis.

However, a previous interim SEC leader stated that the revised edition allows for deceptive environmental claims. During the hearing on Wednesday, several commissioners expressed disappointment with the agency’s decision to weaken the regulation.

Even though I agree with it, I cannot fully endorse it,” stated SEC commissioner Caroline Abbey Crenshaw. She believes the new standard is the least amount of effort that could be put forth.

The Securities and Exchange Commission (SEC) has encountered resistance from corporate interests and Republican state officials who argue that the regulations are a type of excessive control by the agency. Despite significant changes being made to the rule, there is anticipation of numerous lawsuits from conservative officials and businesses.

Shortly after it was approved, West Virginia’s attorney general Patrick Morrisey revealed that a coalition of nine states led by Republicans intends to challenge the ruling in court. However, legal obstacles may also arise from the left as the environmental organization Sierra Club, represented by legal nonprofit Earthjustice, has expressed their possibilities of challenging the SEC’s removal of important provisions from the final rule. However, the group has stated that they would still defend the SEC’s power to enforce such a standard.

Instead of the initial suggestion, all publicly traded corporations would have been obligated to compute and communicate specific levels of greenhouse gas releases. However, the revised regulation will only pertain to big enterprises.

According to Asaf Bernstein, a former senior academic advisor to the SEC, the companies affected by the new climate rule make up 95% of the US market value. However, critics of the rule argue that it only applies to a limited number of companies, leaving out roughly 60% of all domestic publicly traded companies, including smaller firms and emerging growth businesses with annual revenues below $1.2 billion.

Starting in 2025, larger publicly traded companies will have to report both the short and long-term physical risks to their assets posed by factors like hurricanes and droughts. They will also be obligated to disclose any expenditures towards their climate objectives, for example investments in carbon offsets or renewable energy credits. However, unlike the initial proposal, the ultimate regulation does not mandate companies to disclose the board members’ climate expertise.

The regulation will mandate that businesses reveal the level of pollution caused by specific greenhouse gases, but only if the emissions are deemed “material” or crucial to their investors – a significant departure from the initial suggestion. In reality, this will give companies the freedom to choose whether or not to report their greenhouse gas emissions, according to Laura Peterson, a corporate analyst at the environmental organization Union of Concerned Scientists.

Starting in 2026, companies that consider the information significant will have to reveal both their direct and indirect greenhouse gas emissions. Direct emissions, also known as “scope 1”, result from the use of fossil fuels for producing goods, transportation, or heating buildings, while indirect emissions, or “scope 2”, come from purchased energy from utility companies. In response to feedback from those who commented, the last regulations will allow for more time for registrants to submit their emissions disclosures, according to Gary Gensler, the chair of the Securities and Exchange Commission, during yesterday’s meeting.

However, the ultimate rule, in contrast to the agency’s 2022 draft, will not mandate that companies reveal their “scope 3” emissions, which refer to the pollution caused by a company’s supply chain and the use of its goods.

During the hearing, Gensler stated that, in response to public feedback, there is currently no requirement for disclosing scope three emissions.

Legal experts say that modifying the rule could strengthen it against potential legal challenges. However, advocates for climate action argue that it would also weaken the rule’s effectiveness in promoting transparency and accountability.

According to David Arkush, the director of Public Citizen’s climate program, the SEC’s decision to remove Scope 3 disclosures from its rule fails to fulfill its main purpose of providing investors with crucial information for their investment choices.

He stated that the weakening of the regulation highlights the danger posed by a supreme court that has recently limited the ability of agencies to regulate, such as in the case of greenhouse gas emissions. This demonstrates that agencies may refrain from carrying out their duties fully due to self-censorship.

According to Peterson from the Union of Concerned Scientists, investors have been requesting information on Scope 3 emissions for years as they make up a significant portion of a company’s pollution. The SEC has been urged by the organization to implement regulations that require disclosure of these emissions. Deloitte, a consulting firm, states that for majority of companies, Scope 3 emissions account for over 70% of their carbon footprint.

According to Peterson, the inclusion of scope 3 reporting in corporate practices has sparked considerable debate. She suggests that this is due in part to the potential negative impact it could have on a company’s image, as it may reveal previously undisclosed pollution.

Bernstein stated that another factor contributing to the debate is the potential for regulatory challenges. This could occur if smaller companies, who purchase goods from larger corporations, are required to disclose their emissions.

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According to Bernstein, an associate professor of finance at the University of Colorado Boulder, it could give the impression of placing disclosure obligations on private, small, and international firms that are not typically regulated by the SEC.

Despite the reduction in rules, some SEC commissioners continued to argue that it was an excessive use of power.

“According to SEC commissioner Hester Peirce, who was chosen by President Donald Trump, these modifications do not address the underlying flaw of the rule, which continues to prioritize the importance of climate concerns.”

The Securities and Exchange Commission (SEC) recently announced that it has received over 24,000 comments since releasing a 500-page draft proposal in March 2022 regarding new requirements for climate disclosure. This is the highest number of comments the agency has ever received. On Wednesday, the SEC declared that these comments had a significant impact on the final version of the regulation, according to Bernstein.

He suggested that there could be a scenario where regulators receive letters and automatically classify them as “trash,” but that was not his personal experience. He acknowledged that they actually played a significant role in the process.

The United States, along with nations such as China, Chile, Egypt, member states of the European Union, India, and the United Kingdom, have also implemented regulations for public companies to report on their climate impact.

In October, California Governor Gavin Newsom has approved a legislation that mandates big companies operating in the state to provide a comprehensive report of their greenhouse gas emissions by the year 2026. This will impact around 5,300 corporations, including prominent names like Chevron, Wells Fargo, and Amazon, who are also obligated to follow the recently implemented SEC regulations.

There are new regulations being proposed by Republican legislators and business groups that challenge the implementation of environmental, social, and governance standards. This coincides with a growing public apprehension about unclear corporate assertions regarding their strategies for addressing climate change.

However, a few specialists argued that the diminishing of the regulation could be considered as a significant reduction and may not do anything significant to address those worries.

Allison Herren Lee, a former SEC commissioner and current member of the whistleblower law firm Kohn, Kohn & Colapinto, stated that the new rule allows companies to avoid reporting a large portion or potentially all of their greenhouse gas emissions. This could lead to companies falsely promoting themselves as environmentally friendly.

Charles Slidders, a lawyer of high rank who works for the non-profit organization Center for International Environmental Law, stated that the agency gave in to pressure from the industry, and that the regulation may lead to inadequate corporate reporting on climate impacts and risks appearing as legitimate.

“He stated that the SEC’s strategy is a relinquishment of their jurisdiction and obligation to acknowledge and tackle substantial financial threats. Climate change undoubtedly presents these risks.”

Source: theguardian.com