Securities and Exchange Commission Chairman Gary Gensler testifies before Congress on July 19, 2023.
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‘A sensible rule to protect investors’
“Climate risk is financial risk,” Elizabeth Derbes, director of financial regulation and climate risk for the Natural Resources Defense Council, said in a written statement.
“This is a sensible rule to protect investors: it gives them access to clear, comparable, relevant information on the measures companies are taking to manage climate risks and opportunities,” Derbes said.
Overall, transparency around climate risk may be essential for investors to gauge if a company’s stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it’s well positioned?
“Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments,” especially retirement investors who may have a timeline decades in the future, Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum, recently told CNBC.
Rule does not including ‘Scope 3’ disclosures
However, the rule is watered down from its initial version.
For example, the final rule stripped out a requirement to disclose so-called “Scope 3” greenhouse gas emissions. Such planet-warming emissions are those along a corporation’s value chain like suppliers of raw material or by customers using a company’s products.
For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.
Instead, the final rule will require companies require Scope 1 and 2 emissions if they’re deemed material to investors. These are direct emissions caused by company operations and indirect ones from the purchase of energy (from renewable sources or coal-burning power plants, for example).
Challenges could be forthcoming
The rule comes as the Biden administration pledged to cut U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to fight climate change in U.S. history.
It also follows other U.S. and international climate disclosure regimes, such as in the European Union and rules recently passed in California.
Congressional and legal challenges to the rule “are likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote last week in a research note.
While proponents say the SEC rule is well within the scope of its mission to protect investors, others say the agency overstepped its authority.
Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it “exceeds the [agency’s] mission, expertise, and authority.”
The rule is “climate regulation promulgated under the Commission’s seal,” and “hijacks” the agency to promote climate goals, SEC Commissioner Mark Uyeda said before the vote on Wednesday.
