The SEC’s New Climate Rule

Mar 18, 2024 | Climate Change, Financial

The SEC just put out a new climate rule that’s kind of a big deal for anyone investing in public companies: the rule requires disclosure of both carbon emissions and climate risks. This mandate means companies have to open up about their direct emissions (Scope 1) and the emissions from the energy they’re buying (Scope 2). But, there’s a bit of a catch—Scope 3, which covers all the indirect emissions, isn’t part of the compulsory disclosure. And, this rule only applies to larger companies, those with a public float (shares not held by insiders) of more than $75 million.

Maria and Gary: Their Takes on the New Climate Rule

Maria Lettini, CEO of US SIF (the sustainable investment forum), adopts an optimistic view of the situation. She is disappointed that Scope 3 emissions aren’t covered. And that the rules only target large companies. But she sees value in establishing a baseline requirement for disclosing Scope 1 and 2 emissions. In addition, SEC Chair Gary Gensler emphasizes that companies to which the rule applies must now report all material climate risks. This elevates the importance of climate issues from being inconsistently mentioned on corporate websites to having having a place at the adult table of SEC filings, where accuracy and honesty can be enforced by threat of legal action.

I Like Big Markets, and Their Potential Synergistic Effects with the New Climate Rule, and I Cannot Lie

But here’s something else to consider. California is the U.S.’s economic powerhouse. And the European Union is the third biggest economy in the world. Both are on track to demand those elusive Scope 3 emissions disclosures. That could really shake things up. If businesses want to keep their doors open in these massive markets, they might just lean into Scope 3 disclosure, especially if CA and the EU flex their regulatory muscles.

Room for Growth

Only about 45% of U.S. companies are currently upfront about their Scope 1 and 2 emissions. Even fewer disclose Scope 3 emissions. So there’s heaps of room for improvement. This SEC rule just starts the race towards greater transparency.

It’s always important not to let the perfect be the enemy of the good. This new climate change rule lays the foundation. It ensures that climate risks and carbon emissions are part of the investment equation. It puts the big corporations on an equal playing field. Gives investors better tools to minimize climate risk and reward good corporate behavior. And paves the way for even more comprehensive disclosures in the future.

That’s Cool — the Ultimate Point of the New Climate Rule

Now we’ll watch how the SEC’s rule plays out. And we’ll keep an eye on the developments in California and the EU. Hopefully, investors will take this new information and use it to champion companies that are walking the walk. Companies that disclose and then actively reduce their carbon emissions. Because that’s what’s going to cool down the planet and dial back the dangers posed by extreme weather events. This rule is only one step on that journey towards a better, safer future.