Top Five Takeaways from SEC’s Final Climate Rule

Two years after proposing the rule, more than 24,000 comment letters, and a nearly three-hour meeting marked by politically charged statements, the five Securities and Exchange Commissioners voted along party lines (3-2) to approve the final rule requiring climate-related disclosures for public companies listed on US stock exchanges.  

Here is the TL/DR from the 886-page document with five key takeaways:

• Materiality rules: The SEC went back to basics by requiring companies to only disclose climate issues that are “financially material.”  The definition of financial materiality has been debated for years and was determined by a Supreme Court ruling (TSC Industries v. Northway) as “a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote or make other investment decisions.”  

There is one (big) exception for physical climate risks: Companies must disclose financial impacts greater than 1% of profits before taxes (specifically, companies must disclose capitalized costs, expenditures, charges, and losses incurred).

• Scope 3 emissions are out, but risks are still in play: Most of the coverage of the final rule has focused on exempting “Scope 3” emissions (value chain emissions) from disclosure. Although disclosure of Scope 3 emissions is not required, companies must disclose material climate risks and many of these risks occur in value chain activities (Scope 3). The SEC excluded reporting on laborious and uncertain Scope 3 emissions while keeping the focus on assessing material climate risks in the value chain (the SEC explains this point on page 91 of the final rule). 

• TCFD backbone: The framework from the Task Force on Climate-related Financial Disclosures (TCFD) forms the backbone of the final rule. And, because the TCFD framework is also the common denominator in shaping other major climate standards (e.g., the EU and ISSB Standards), it is a helpful starting point for companies trying to “hit the easy button” to sort out all the new requirements. 

• Phased-in approach: Recognizing the costs and burden of disclosure, this final rule maintains a phased-in approach and exempts smaller companies from some requirements. The largest companies that are first to comply must collect information from FY2025 to be reported in FY2026. The phase-in and exemptions were also applied to assurance requirements.  All of the disclosures must be made in the annual 10K filing with a notable exception: material scope 1 and 2 climate emissions can be disclosed in the company’s second-quarter 10Q filing - giving companies more time to collect and report this information.  

In the graphic below, we took a crack at decoding the phase-in timeline in the SEC factsheet.

• Litigation delays and equivalency: As predicted, the ink wasn’t dry before the Attorneys General from ten conservative states filed a lawsuit to block the SEC’s final rule. There will be other suits filed in the coming days, and although the rule is supposed to go into effect in 60 days, the litigation will delay implementation.  

In the meantime, companies must still grapple with a litany of similar requirements - for example, the Corporate Sustainability Reporting Directive (CSRD) from Europe, the new California climate laws, and various capital market listing rules (e.g., UK, Japan, Australia, Singapore, China, etc.). While the SEC did not provide much guidance on equivalency with other similar requirements, they did reference both the CSRD and California’s climate bills, how many companies will be covered by both the SEC rules and these other rules (~3,700 and ~2,520, respectively). They concluded that complying with these other rules would provide affected companies with systems and processes to comply with the SEC rule (pages 601-611). 

SEC Climate Rule Fallout

The final rule took heat from all sides of the political spectrum. Some said the bill did not go far enough, like former commissioner Allison Herren Lee, who said, “Thanks to corporate lobbying, disclosure of the very real financial risks from climate change has fallen victim to the culture wars.” Democratic Commissioner Caroline Crenshaw said, “To be crystal clear, though, this is not the rule I would have written. While these are important steps forward, they are the bare minimum.”

Others like Republican Commissioner Hester Peirce, who voted against the bill, believe the SEC is exceeding their remit, saying the rule “promises to spam investors with details about the commission’s pet topic of the day, climate.” Democratic Commissioner Jaime Lizárraga took the pragmatic middle, saying the Commission should not let “the perfect be the enemy of the good.” 

Despite the main headline across most news sources being the extent to which the bill was weakened, both sides will still litigate. Republican state Attorneys General are already suing, and fossil fuel companies are likely to join them, arguing the SEC exceeded their authority. On the other side, the Sierra Club and others indicated they would take legal action alleging that the final rule did not go far enough. 

As an editorial comment, the final rule strikes a healthy balance between giving investors decision-useful information, reducing the cost of compliance, and mitigating litigation risk.

SEC Chair Gary Gensler invoked President Franklin Roosevelt, who signed the law authorizing the Commission, saying, “Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies provide ‘complete and truthful disclosure.’” Gensler went on to note that most publicly traded companies are already issuing climate disclosures roughly aligned with the SEC rule. 

The litigation over this rule will take time and, in all likelihood, will be decided in the US Supreme Court. The court recently heard a case that many think will result in overturning the “Chevron Deference” - which gives deference to the executive branch agencies to interpret law. In addition, the court has recently exercised its new “major questions” doctrine related to environmental matters by restricting the authority of the Environmental Protection Agency (EPA).  Taken together, these cases paint a dim picture of this rule as the court challenges escalate.  

Last Chance for the EU Due Diligence Directive  

Last week, we reported that the EU may have reached peak sustainability when the beleaguered Corporate Sustainability Due Diligence Directive (CSDDD) lost what was meant to be a rubber-stamp vote.  This week, the EU will try one more time to approve a substantially diminished version of the policy.   

The new proposal has a longer phase-in and relaxes the companies that are subject to the rules from those with more than 500 employees and €150 million of turnover to 1,000 employees and €300 million. Also, the new proposal removes obligations for downstream activities and climate transition plans. In a last-ditch attempt to gain support, this version included information on how it benefits EU agriculture.

The current Belgian EU Presidency statement said, "The Presidency considers that the overall compromise proposed is balanced and should enable an agreement on the text." The bill will now go to a final vote today (Friday, March 8th). However, one delegate conceded that this was the last chance, saying, “If there is no willingness to support this, that is the end.” 

“Transition Investing” 

After BlackRock’s CEO Larry Fink said last year that he had stopped using the “toxic,” “politicized” ESG term, companies have been using a whole host of substitutes - from responsible investing to rational sustainability.

Now, it seems that the world’s largest asset manager has adopted “transition investing” to describe investments formerly described as ESG. BlackRock’s rebranding is aimed at appeasing states like Texas, which banned state funds from “ESG” investing.

CBAM Teething Problems

The world's first carbon border tax, the EU’s Carbon Border Adjustment Mechanism (CBAM), is experiencing some growing pains. CBAM is currently in its first phase, during which affected companies were expected to report the climate emissions associated with the production of seven carbon-intensive commodities by January 31, 2024.

However, less than 10% of the 20,000 affected German companies, and only 11% of Swedish companies reported by the deadline. Jürgen Landgrebe from Germany’s federal environment agency said, “We expect a much larger number of reports than so far received.” Companies will have until mid-July to comply with this first phase, or they could face fines of up to €50 per tonne of carbon emissions.

Who is To Blame for Climate Change

Climate activists reacted with fury as Exxon chief Darren Woods claimed that the public was to blame for climate inaction. Woods said, “We have opportunities to make fuels with lower carbon in them, but people aren’t willing to spend the money to do that.” Insinuating that the clean energy transition would be possible only if the public were willing to pay extra.

Gernot Wagner, a climate economist at Columbia Business School, likened the comment to “a drug lord blaming everyone but himself for drug problems,” adding, “I hate to tell you, but you’re the chief executive of the largest publicly traded oil company, you have influence, you make decisions that matter.”

John Kerry Leaves Climate Envoy Post

Wednesday marked the last day for the first US Climate Envoy. John Kerry has been pivotal in bringing joint climate agreements between the US and China and has been the face of US climate action for the last four years. The now 80-year-old Kerry isn’t planning on retiring. Kerry said, “Hey, I’m not quitting. I’m not retiring,” he plans to help on the Biden reelection campaign and assist with the renewable energy transition.

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Other Notable News:

• The Texas wildfire, which grew to be the largest ever in Texas and the second largest in US history, had a complex relationship with climate change. According to scientists, it was not the local drought that caused the fire to be so extreme. It was actually a wetter winter, followed by high temperatures and high winds.

• Two young climate scientists and friends at Stanford have very different ideas of what fossil fuels' role in research should be. One is Exxon-funded and believes that there are people within oil and gas attempting to bring change from the inside, while the other is less convinced. 

• A California man became the first man ever to be charged with smuggling carbon emissions. The man is charged with bringing in HydfroFlouroCarbon (HFC) refrigerants, a powerful greenhouse gas, from Mexico to San Diego. 

• The temperature records keep tumbling. February was the hottest ever, and the global average temperature for the past 12 months is the highest on record, coming in at 1.56°C above the pre-industrial levels.  

• The EU is close to finalizing a new law to ensure that all packaging is recyclable by 2030, with the goal of reducing single-use plastic. The new rule will require takeaway businesses to let customers bring their own drink and food containers, and sold containers must be reusable. 

• Investors are struggling to cope with a huge flow of ESG data, an issue made worse by new sustainability reporting regulations like the EU’s CSRD. 

Notable Podcasts: 

• This week’s episode of the BBC’s The Climate Question asks some of the world’s first “Chief Heat Officers” what their role is like. Host Graihagh Jackson talks to two heat officers from Freetown, Sierra Leone, and Monterrey, Mexico, asking what their role involves, what solutions are out there, and whether they get enough funding.

• In the most recent episode of FT’s Unhedged podcast, hosts are joined by FT reporter and author of the newsletter Moral Monet Simon Mundy to discuss “Is ESG Over?” They go through all the reasons ESG investing has gone from a dominant part of ESG investing to a financial pariah.