SEC Votes to Finalize ESG Disclosure Regulations

The Securities and Exchange Commission (SEC) voted along party lines on March 6 to finalize its climate disclosure regulations. The final rulemaking does not include a requirement for public companies to disclose so-called "scope 3" emissions, and requirements for companies to report "scope 1" and "scope 2" emissions have also been scaled back.

So-called “scope 1” emissions refer to emissions from sources that public companies own or control directly. Scope 2 emissions refer to indirect emissions from purchases made directly on behalf of the company, for example, the electricity purchased from a utility provider. Scope 3, which is often the most difficult category of emissions to calculate, encompasses all indirect emissions up and down the value chain.

NATSO previously urged the SEC to omit the scope 3 reporting requirements in written comments on the proposed rule. NATSO argued that the regulations should be “refined to avoid unnecessarily burdensome, and in some cases counter-productive, obligations on public and private companies.”

Under the final rule, the start dates for disclosures will vary based on company size. Companies that are required to comply with the rulemaking will also have a phased timetable to report scope 1 and scope 2 emissions. The rulemaking similarly establishes a “safe harbor from private liability” for the newly mandated disclosures. The safe harbor intends to shield obligated entities from legal challenges over the transition plans, scenario analysis, and use of an internal carbon price.

Though the final SEC rule eliminated scope 3 reporting requirements, California passed its own climate disclosure laws last year that will require all businesses that operate in the state to report scope 3 emissions by 2027. California’s new law is currently facing multiple lawsuits.

The SEC’s final rulemaking will go into effect 60 days after it is entered into the Federal Register, and is likely to face litigation in the coming months.