The proposed rules would require public companies to disclose their greenhouse gas emissions for the first time and provide more details on their climate pledges. They would push forward President Joe Biden’s effort to curb climate-related financial risks and help investors better understand how the companies they invest in are dealing with climate change.
Under the rules, companies must disclose Scope 1 and 2 emissions. Scope 1 emissions result directly from a company's operations, like emissions from furnaces and vehicles, while Scope 2 emissions are the result of third-party activities related to the company's operations but not directly controlled by them, such as emissions from power plants that keep the lights on at headquarters or warehouses.
Public firms would also be required to detail “material” Scope 3 emissions from suppliers and partners. Scope 3 emissions make up the lion's share of most companies' carbon footprints.
Companies would also be asked to provide a range of information on their climate pledges — if they have one in the first place — including the company’s plan for meeting climate-related goals and data indicating how much they have moved toward their targets each fiscal year.
The SEC also wants to require companies to disclose how climate-related risks will affect their strategy, business model and outlook, as well as the company’s process for detecting and managing climate risks. Larger businesses would need to have an independent auditing firm check the emissions generated at their own facilities.
Taken together, the rules would create a uniform process for reporting companies’ effects and plans for climate change. Several companies already report their greenhouse gas emissions, but details vary by company. For example, the Washington Post pointed out that Ford Motor discloses the total emissions produced across its vehicles, while Tesla only provides emissions generated from building Model 3 cars.
The rules can take effect after a 60-day public comment period. After that, the SEC will release a final set of rules and vote on them, which could take several months. The SEC didn’t say how the rules would be enforced during a call this morning.
There is already a variety of accounting mechanisms and a patchwork of voluntary disclosures. The SEC framework could be a first step toward getting everyone on the same page, though disclosure alone hasn't proven to be enough of a tool to get companies to reduce emissions. Even the strongest climate plans have also proven a challenge for companies to meet, which reflects the need for a larger societal shift and policies to usher in a zero-carbon economy.