The United States Securities and Exchange Commission (SEC) has approved its anticipated climate disclosure rules, but watered down emission disclosure requirements under pressure from politicians and lobbying groups—making it less stringent than jurisdictions like the European Union and California.

On March 6, the SEC voted 3-2 to require public companies to include information on climate-related risks in their filings, but left out requirements for companies to include Scope 3 emissions, which measures pollution from supply chains and customers, writes Moriah Costa for Green Central Banking. The rules also softened the requirements for when companies will need to reveal their direct emissions, known as Scope 1 and 2.

Some industry groups strongly oppose including Scope 3, but an analysis of the thousands of comments the SEC received in 2022 found that over 97% of commenters support their inclusion.

The rules also require companies to report any actual and potential material impact on climate-related risks on their business strategy, model, and outlook, as well as activities to mitigate or adapt to such risks.

The addition that certain information needs to be “material” for companies to have to include it is a significant change from the proposal made around two years ago, reports Bloomberg. “In practice, that limits those disclosures to what is deemed important for decision-making by a reasonable investor.”

The new rules are meant to give investors greater insight into how climate change poses threats to publicly listed companies—their operations and finances—and into whether businesses are contributing to a warming planet through their emissions, explains CNBC. Data disclosure on those points had been voluntary—and was not widely available for all but a few sectors—but the rules would make this information more accessible, in annual filings with the SEC, such as a Form 10-K, and in registration statements filed before an initial public offering.

But thousands of smaller businesses are exempt, whereas the original proposal would have required all publicly traded corporations to disclose their direct emissions, notes the New York Times. And compared to the original proposal, the final rules also do not include a requirement that companies state the climate expertise of board members.

The rules will be phased in over time, Green Central Banking says, depending on the size of the company and type of disclosure. Larger companies will need to start reporting in 2026, while smaller companies have until 2028 to begin.

Political Backlash

The final rules were passed along party lines after two years of debate and are likely to come under legal scrutiny from both Republicans, who accuse the SEC of going beyond its jurisdiction, and environmental groups, which say the rules don’t go far enough. The Sierra Club said it is considering challenging the SEC’s removal of key provisions from the final rule.

Bill Harter, principal ESG solutions advisor at Visual Lease, said he’s less concerned about the legal issues that are likely to come up and more about a potential Congressional rollback. Under the Congressional Review Act, Congress can overturn final rules issued by federal agencies within 60 session days.

Harter believes the ruling was rushed to be delivered before the upcoming U.S. election, when a new administration could potentially trigger the 60-day overturn, while Scope 3 was removed to try to appease those who might otherwise oppose the rules.

“It’s a very divided country today and what we’re seeing with this rule is just reflective of that,” he said.

SEC Chair Gary Gensler has pushed back against claims the commission should not be involved in climate issues, saying investors want the information.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information,” he said. “It’s in this context that we have a role to play with regard to climate-related disclosures.”

Commissioner Caroline Crenshaw, a Democrat, supported the rule but expressed disappointment that Scope 3 emissions were not included. She said she hoped stronger disclosure requirements could be introduced in the future.

“Disclosure of greenhouse gas emissions provides information that helps investors understand the current and potential financial risks a company faces,” she said. “Given our clear authority, rolling back the proposals is a missed opportunity.”

But Republican commissioner Hester Peirce criticized the final rule, saying it differed too much from the proposal and was likely to “overwhelm investors, not inform them”.

“The final rule is different from the proposal, but it still promises to spam investors with details about the Commission’s pet topic of the day—climate,” she said.

Impact of Leaving Out Scope 3

Leaving out Scope 3 emissions from disclosures  is unlikely to change much for larger multinational companies like banks, as many have made net-zero commitments and have already invested a lot of money and resources in collecting data around their emissions, said Hortense Viard-Guerin, director at consulting firm Baringa Partners.

“Global financial institutions have started to link this collection of data and the reporting of this data to their strategy and to their business strategy,” she said.

Scope 3 emissions are also required in other jurisdictions, such as California, and other U.S. states like New York are considering similar legislation. According to some estimates, nearly 75% of Fortune 1000 companies could be required to disclose their carbon emissions under California’s climate disclosure rules, although the legislation is being challenged in court.

The new SEC rules also require fewer disclosures than other regulations worldwide, like the International Sustainability Standards Board’s IFRS S1 and S2 and the EU’s CSRD and ESRS, according to David Carlin, founder of Cambium Global Solutions, who posted a comparison on social media.

As noted by climate think tank E3G, U.S. companies that operate in Europe will still be bound to those stricter requirements.

“I think California and the rest of the world has, to a large extent, stolen the thunder of the SEC,” said Harter.

The impact of the SEC bill is more that there’s a “resolution in companies’ minds that we now have some certainty and can move ahead,” he said.

But having so many different disclosure rules is likely to cost more money and resources for companies, Viard-Guerin said. “It’s way easier for a company to be able to have a single report that they produce at a group level as opposed to very different requirements across different legal entity jurisdictions and even states.”

Advocates Disappointed

Many advocacy groups were disappointed by the SEC’s decision to leave out Scope 3 emissions, though they were glad the rules were finally approved. The U.S. needs to do more to become a climate leader, said E3G Associate Director Kate Levick.

“Finalization of the SEC’s climate disclosure rule is a big achievement, but the U.S. is still behind the curve internationally,” she said.

Sierra Club Executive Director Ben Jealous said the ruling is a positive step but falls short of its mission, leaving investors “in the dark about critical information needed to make informed choices about companies’ financial risks, including risks stemming from the failure to invest in the transition to a decarbonized economy”.

The SEC heeded special interest groups amid fears of litigation, setting a bad precedent for federal agencies, said David Arkush, director of Public Citizen’s climate program.

“This decision illustrates the peril of recent Supreme Court decisions restricting agency authority—that agencies will self-censor and decline to execute their roles fully,” he said.