About two years after releasing its draft regulation, the Securities and Exchange Commission (SEC) has at long last issued its final climate disclosure rule. Last year, I convened a group of faculty from Columbia’s Master of Sustainability Management program to design a set of new courses to respond to this coming change. This year we offered three new courses on the topic, adding to existing courses in Corporate Sustainability Reporting, Greenhouse Gas Measurement, and Life Cycle Assessment. This past fall, we held a panel discussion on the issue, which also focused on environmental reporting requirements in California and the European Union. Earlier this year I wrote about the importance of the SEC’s climate disclosure regulation. While the new rule is controversial, it is also an important step in the development of the field of sustainability management.
The SEC was facing a political deadline due to the uncertainty caused by the 2024 Presidential and Congressional elections. They really had no choice and finally acted last week. According to the SEC’s website:
“The Securities and Exchange Commission today [March 6, 2024] adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules. “Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” said SEC Chair Gary Gensler. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.” Chair Gensler added, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
The final rules reflected over 24,000 comments and intense debate about what was reasonable and necessary. Environmentalists were unhappy about the omission of reporting on scope 3 emissions, or emissions from an organization’s supply chain. There were other changes in the proposal and the New York Times and other media outlets headlined the release of “weakened” or watered down rules. I really wish these news reporters would leave the opinions to the editorial side of the house and keep these assessments out of news stories. Certainly, environmental advocates do not stay in business unless they comment that the government is not doing enough to protect the environment. Predictably these “news reports” quoted interest groups who thought the rules were not tough enough and those who questioned the need for any SEC action at all. A “balanced” story needed to present the views of those who thought the rule was either too weak or too strong. But no one was quoted who thought the new rules were reasonable and appropriate. The carbon disclosure rules are being opposed by at least ten states led by West Virginia’s Attorney General Patrick Morrisey. Many environmental advocates think the rule does not require companies to disclose their full climate impact, and New York Times coverage focused on the difference between the original draft proposal and the final rule. One New York Times piece was headlined: “S.E.C. Approves New Climate Rules Far Weaker Than Originally Proposed…The rules designed to inform investors of business risks from climate change, were rolled back amid opposition from the G.O.P., fossil fuel producers, farmers and others.” Another Times piece was headlined: “How a Climate Rule Got Watered Down.”
Rulemaking, like budgeting has a strategic logic that I’m certain these reporters understand but decided to ignore. When an agency proposes a budget, they know that their request will be cut and certainly they’ll never get more than they ask for. So, their initial request leaves room for cuts that can be easily absorbed. Similarly, in the regulatory process, proposed regulations are nearly always more stringent than the final regulations. Regulators know to put everything on the table, so they can give up some provisions and still retain a workable rule. Later, once the new rule is in effect, revisions based on operational experience, or new scientific findings, tend to make the rule more stringent. The goal with a new regulation is to get your foot in the door, establish the legitimacy of the rule, and then work over time to improve it. The Associated Press presented a less slanted heading on the story stating: “SEC approves rule requiring some companies to report greenhouse gas emissions. Legal challenges loom. Perhaps the Times reporters and headline writers could put their biases aside and strive for an AP style of objectivity.
In my view, the SEC rule is a first step in codifying the measurement of the environmental impact of publicly traded corporations. On a more crowded and environmentally stressed planet, investors need to know the environmental risks posed by their investments. Climate is only one of these environmental risks. Biodiversity, infectious diseases, toxics, and other forms of environmental damage caused by corporations or potentially caused by others but impacting corporate functioning also pose financial risks to investors. The SEC’s actions last week are a watershed moment in legitimizing sustainability metrics; a key step in helping us learn how to manage our economic growth without destroying our planet.
In addition to comparing the March 6th SEC rule to the proposed rule, these New York Times reporters might have compared the rule to the situation on March 5th, 2024, when we had no rule. Before March 6, every company raising capital in America’s public marketplace could release whatever environmental information they wanted to release. This was the situation with financial data leading up to the stock market crash of 1929. Back then, companies reported whatever financial information they felt like releasing. The lack of reliable information turned the stock market into a casino. This ended with the New Deal’s creation of the SEC in the 1930s. The SEC defined financial reporting which led to the development of the profession of financial accounting and the job of Chief Financial Officer (CFO). SEC rules on corporate reporting have been evolving since the 1930s. My hope is that the actions taken last week by the SEC will give rise to the field of environmental accounting and accelerate the development of sustainability metrics. The rulemaking process identified practical issues with the proposed rule and resulted in a more modest, but defensible final rule. Measurement of greenhouse gas emissions is complicated—certainly more complex than measuring revenues and expenditures. Corporate reporting to the SEC has evolved to include disclosure of potential conflicts of interest of corporate boards, as well as other rules to reduce the possibility of self-dealing and fraud. Assuming the carbon rule survives the conservative court system and the appeals it will now confront, the regulation will accelerate our ability to refine these measures and base management decision making on steps that enable the most cost-effective reductions to pollution feasible. The elimination of scope 3 emissions from the rule was in part a response to the difficulty of one organization measuring greenhouse gasses emitted by another organization that they do not control. But if every organization in the supply chain is eventually required to report their own scope 1 and 2 emissions, eventually emissions in a supply chain would be more accurately estimated. Since the supply chain is global and the SEC rule is limited to the United States, the accurate measurement of scope 3 emissions may well be a long time in coming. But what is important is that government’s regulation of corporate environmental reporting has finally begun
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.
