The sustainable investment industry in the United States has grudgingly endorsed a watered-down regulation on climate disclosure, acknowledging a barrage of lobbying and legal threats that thwarted tougher carbon-reporting requirements.
“This rule is a floor, not a ceiling, for companies to report how their business is adapting to a global economy that is transitioning away from fossil fuels,” said Maria Lettini, CEO of the U.S. Sustainable Investment Forum, in a statement.
The rule, approved last week by the Securities and Exchange Commission (SEC), will provide “an achievable floor of disclosure” on company climate emissions and physical and transition risks, said the chief executive of the association whose members manage US$5 trillion in assets.
When fully in place in 2026, the rule will require large, publicly listed companies to disclose their Scope 1 and Scope 2 greenhouse gas emissions from their direct operations and energy use if the emissions are sizeable enough to represent a material financial risk to the company. Smaller companies will start reporting in 2028.
Under heavy lobbying from business organizations and threats of legal action, the SEC pulled back from a proposal two years ago to also require disclosure of Scope 3 greenhouse gases, the end-use releases that make up about 75% of all emissions. The earlier proposal also would have required companies to report on their Scope 1 and 2 emissions regardless of whether they are financially material. Even with the concessions, 10 Republican-led states launched a legal challenge against the rule, meaning its survival will ultimately be decided in the courts.
The sustainable investment industry was among the strongest supporters of the SEC’s initial proposal.
“The SEC’s new climate rule will help make it clearer which companies are living up to their climate pledges and which are doing nothing more than greenwashing,” said Al Gore, former U.S. vice-president and co-founder of sustainable asset firm Generation Investment Management. “But it’s not the full accounting of corporate climate pollution that we need,” he wrote on X, formerly Twitter.
“It’s a step forward, but we feel it’s too little too late,” said Leslie Samuelrich, president of sustainable investment manager Green Century Funds, blaming “vigorous opposition by trade groups” for the pullback.
“The SEC’s new rule can be seen as a step in the right direction, even if it backtracked from some provisions in earlier proposals,” said a post from the global corporate rating agency Sustainalytics.
Largest consultation in SEC history
Last week’s decision caps off two years of consultations in which the SEC heard from 24,000 investors, companies, lawmakers, think tanks and citizens. It was an unprecedented level of public debate for an initiative spearheaded by the regulator.
The lobbying was particularly heavy by Republican lawmakers and large corporate interests, led by the U.S. Chamber of Commerce.
While the future of the SEC rule is in doubt, large global corporations are facing a rising tide of mandatory climate reporting requirements around the world. Most notably, the European Union Corporate Sustainability Reporting Directive will require European-listed companies to disclose all three scopes of emissions, as well as detailed climate risk disclosures and “double materiality” impacts (real-world effects on people and the environment).
The SEC estimates that 3,700 U.S. companies with business in Europe will be subject to the European rules when they go into effect between 2025 and 2029.
The state of California has also approved new climate reporting requirements that apply to 5,300 large companies – including some large oil and gas conglomerates like Chevron – for all three scopes of greenhouse gas emissions and climate risks.
In February, China announced new sustainability reporting requirements for companies listed on its three major stock exchanges. The sweeping rules include mandatory disclosure on all three scopes of carbon emissions, as well as reporting on environmental, social and governance impact and risk factors. Similar to the EU rules, the regulations include a “double materiality” standard.
Eyes on Canada
As home to one of the world’s largest fossil fuel industries, Canada also has a large role to play in the evolving world of climate reporting.
The new SEC rule will apply to more than 200 large Canadian companies that trade on U.S. stock exchanges, including some of the country’s biggest oil, gas and pipeline companies.
On March 13, the Canadian Sustainability Standards Board (CSSB), the Canadian branch of the International Sustainability Standards Board (ISSB), released its own climate reporting framework, based on the ISSB standard, which includes Scope 3 reporting.
Once finalized later this year Canada’s securities commissions could then make the ISSB reporting standard mandatory for Canadian publicly listed companies.
The Canadian Securities Administrators (CSA) – the umbrella group for Canadian securities commissions – has already proposed reporting requirements similar to the final SEC rule. But the securities commissions suspended that proposal while awaiting the CSSB framework. Once the CSSB standard is finalized, CSA will issue a new climate reporting proposal for adoption by provincial securities commissions. The CSA said its proposal will consider the CSSB standard “and may include modifications appropriate for the Canadian capital markets.”
The big question is whether Canada will go further and adopt full-scope climate reporting like the Europe-California-China standard or simply default to the weaker SEC rule, aligning Canada and the U.S.
Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.
