The U.S. Securities and Exchange Commission passed its highly anticipated climate disclosure rule Wednesday, nearly two years after the agency released its initial proposal. The final rule — a pared-down version of the original — scrapped scope 3 emissions disclosures entirely and scaled back scope 1 and scope 2 reporting requirements.
The regulation’s narrower parameters come against a backdrop of strong pushback from companies and mounting political criticism. The SEC said it received over 24,000 comments since releasing the rule in March 2022, including around 8,100 in the 72 hours leading up to Wednesday’s open hearing, Chair Gary Gensler told reporters. The agency announced plans to vote on the rule last week, following reports of it dropping scope 3 requirements from the rule.
Though the climate rule was approved, it passed with a 3-2 vote count, with three Democrats — Gensler, Commissioners Caroline Crenshaw and Jaime Lizárraga — supporting it, and two Republicans — Commissioners Hester Peirce and Mark Uyeda — opposing it. Despite their party affiliations, Crenshaw was nominated by then-President Donald Trump and unanimously approved by the Senate in 2020, while President Joe Biden nominated Uyeda in 2022. The tight vote stood in contrast to the unanimous approval the commission’s only other agenda item, amendments to the national market system stock order execution disclosure requirements, received.
The split vote hinged on the commissioners’ views on the SEC’s authority — or lack thereof — to probe companies for climate-related disclosures. Even the rule’s supporters argued the agency had not gone far enough, while its critics alleged the agency had gone too far.
The conflicting opinions from either side of the aisle set the stage for what followed soon after the 866-page rule was approved and made its way to the Federal Register. Environmental groups such as Sierra Club and Earth Justice said they were considering legally challenging the SEC’s “arbitrary removal of key provisions” from the final rule, while a coalition of 10 Republican states said they had launched a lawsuit in the U.S. federal appeals court to block the implementation of the climate disclosure rule.
“While the final decision is more watered-down than we initially anticipated, it’s important to note it was a bill designed to get a yes vote, which it ultimately did,” Alyssa Rade, chief sustainability officer at supply chain decarbonization platform, Sustain.Life, said in an email to ESG Dive.
The SEC is overextending its authority
Peirce, the longest-tenured commissioner, said during her testimony that though the agency had dropped scope 3 reporting requirements and put forward a proposal that was different from the original, it still sought to “spam investors with details” about climate.
“These changes do not alter the rules fundamental flaw: its insistence that climate issues deserve special treatment and disproportionate space in commission disclosures and managers and directors’ brain space,” Peirce said.
She said she did not support the rule because the commission failed to justify this “disparate treatment,” and such climate-related disclosures would “overwhelm investors, not inform them.” Peirce also said the commission could “trigger a hodgepodge of requirements tailored to meet the demands of a fast and ever-expanding panoply of special interests” that could include stances on abortion, cannabis or even war.
Peirce further questioned the SEC’s authority to demand such disclosures, and said the agency wasn’t created to satisfy the wants of every investor, but to serve the “interest of the objectively reasonable investor seeking a return on her capital.”
“We lacked the expertise to oversee these special interest disclosures and only a mandate from Congress should put us in the business of facilitating the disclosure of information not directly related to financial returns,” Peirce said.
Uyeda’s testimony mirrored Peirce’s criticisms. He said the commission had “ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change.” He added that if it remained unchecked, there was potential for “further misuse of the commission's rules for political and social issues and an erosion of [the] agency's reputation as an independent financial regulator.
Peirce and Uyeda both opined that the rule could have been re-proposed rather than approved Wednesday. Gensler later told reporters that re-proposals are a process the agency has not used “in decades,” and he is confident the agency followed all requirements of the Administrative Procedure Act.
“I think this final climate risk disclosure role is well within the agency's mandate,” Gensler said. “It's solely focused on disclosures to investors [and] it’s grounded in materiality.”
The SEC “is doing what it was designed to do”
Crenshaw delivered the commission’s most pointed criticism of the rule’s absence of scope 3 reporting. While she supported the approval of the rule, she told the agency it had a remit to go much further, including maintaining the proposed rules scope 3 requirements and broader scope 1 and scope 2 reporting requirements. Crenshaw said that, while the finalized rule “is better for investors than no rule at all,” it “adopts an unnecessarily limited version of [climate-related] disclosures.”
“The Commission has clear authority under the Securities Act and the Exchange Act to require disclosures that are in the public interest and for the protection of investors, as today's rule is,” she said. “This well-established authority has been consistently relied upon and affirmed and reaffirmed across dozens of disclosure rulemakings over multiple decades. And this authority would have supported a more robust rule.”
Before the vote commenced, Gensler said that the “SEC has no role as to climate risk itself,” but the agency did have a role with regard to disclosures. However, during a media roundtable after the vote, he noted that the final version of the rule was “responsive to the various comments [made] by investors and issuers.”
Lizárraga, who cast the final deciding vote, said that the climate-related disclosures proposed by the commission were “no different from many of the commission’s existing disclosure requirements,” and responded to “investor demand for standardized and comparable information on climate related risks and impacts.”
He added that the rule should also prevent greenwashing, as it holds registrants liable for any materially false or misleading statements regarding climate risk.
Lizárraga said the commission was well within its authority to propose climate disclosure rules because climate risks can be material to investments and voting decisions, and these risks, ultimately, can have a material impact on a company’s bottom line.
“The commission is doing what it was designed to do: Protect investors and foster transparent capital markets by improving the reliability, consistency and comparability and material climate risk disclosures for investors,” Lizárraga said.
The climate disclosure rule will go into effect 60 days after it is entered into the Federal Register, which it still has not been as of press time.
