What to Know About the SEC's New Rule Requiring Greenhouse Gas Emissions and Climate Risk Reporting
The U.S. Securities and Exchange Commission (SEC) has given its approval to a groundbreaking rule requiring select public companies to disclose information related to greenhouse gas emissions and climate risks. This move brings the United States in closer alignment with the European Union and California, both of which have already implemented corporate climate disclosure regulations. The rule, passed by a 3-2 vote, has undergone revisions due to considerable pushback from companies, making last-minute adjustments to certain aspects.
This anticipated rule has been one of the most discussed and contested regulatory proposals in recent years. During the two-year process, the SEC received more than 24,000 comments from various stakeholders, including companies, auditors, legislators, and trade groups. The final version of the rule was disclosed during the SEC meeting on Wednesday.
The weakened rule no longer mandates companies to report certain indirect emissions known as Scope 3. These emissions, arising from a company's supply chain or from a consumer using a product, were a contentious point during discussions. Critics argued that quantifying Scope 3 emissions, especially from international suppliers or private companies, would be challenging. The SEC, considering this opposition, ultimately dropped Scope 3 reporting requirements.
Reporting obligations for emissions, including Scope 1 (direct emissions) and Scope 2 (indirect emissions from energy production), have been scaled back. Companies must report these emissions only if they consider them "material" or significant, allowing discretion in disclosure. Smaller companies are entirely exempt from reporting emissions.
Opposition from companies and business groups focused on the complexity and potential cost of Scope 3 reporting. Gathering information from international suppliers and private entities posed challenges, leading the SEC to exclude Scope 3 from the final rule. Environmental groups argued that Scope 3 emissions constitute a significant part of a company's carbon footprint, and excluding them could result in incomplete reporting.
The U.S. Chamber of Commerce, a vocal opponent already suing over California's climate disclosure rule, is reviewing the final version.
The finalized rule, approved amid global climate concerns, will impact publicly traded companies. It covers anticipated costs of moving from fossil fuels and risks tied to climate-related events. The SEC estimates around 2,800 U.S. companies and 540 foreign companies with U.S. operations will be subject to disclosures. Larger companies begin reporting emissions in fiscal year 2026, while smaller ones start in fiscal year 2027 with fewer requirements.
