US SEC adopts climate rule that may face challenges despite dilution

By Isla Binnie and Ross Kerber

(Reuters) - Wall Street's top regulatory body voted on Wednesday to adopt a rule that would require public companies to disclose certain climate-related risks, a first-of-its-kind regulation that was watered down from an earlier draft.

It drew a mixed response, with the top U.S. business group threatening to sue the agency, while several environmental groups applauded but said they had hoped for stricter requirements.

First proposed in draft form in March 2022, the U.S. Securities and Exchange Commission (SEC) rule aims to set a standard for how companies communicate with investors about greenhouse gas emissions, weather-related risks, and how they are preparing for the transition to a low-carbon economy.

SEC Chair Gary Gensler, whose legacy will partly be defined by this effort, said standardizing this information and turning guidance into firm rules would benefit companies and investors alike.

Gensler emphasized the SEC's role as a financial regulator, using a stock market analogy for trading decisions.

"You could use this disclosure to go short green or long green… it's just disclosure, we are completely neutral," he told reporters after the vote.

The rule drops an earlier proposal to ask larger companies to gather and report data on planet-warming emissions from suppliers and end-users of their products, known as Scope 3 emissions, in some circumstances. Reuters first reported this change last month.

In a further move away from the more prescriptive draft, it also allows those larger companies to determine whether emissions from their own operations and the power they purchase constitute information that investors need to make decisions.

The two Republican commissioners voted against the rule while their three Democratic counterparts voted for it. Companies and politicians that oppose it are now widely expected to challenge it in court.

"The Commission ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change," said Republican Commissioner Mark Uyeda.

Uyeda said the rule would force companies to spend time and money on discussing climate at the expense of "other matters that could have greater and more immediate impacts".

IMPACTS ON BUSINESSES

The rules are part of Democratic President Joe Biden's agenda to address climate change threats through federal agencies and would join similar requirements in Europe and California.

Companies will be asked to add a note to their financial statements detailing costs stemming from severe weather events like hurricanes and wildfires, but a proposed requirement to split out the impacts of those costs was narrowed.

Smaller firms - that comprise the majority of U.S companies - will be exempt from reporting their greenhouse gas emissions.

Still, the Chamber of Commerce business group, which has filed a lawsuit against California's rules, said it may consider legal action.

"While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors," senior Chamber official Tom Quaadman said in a statement.

Leah Malone, head of ESG at law firm Simpson Thatcher Bartlett, said the final rule reduced the burden on companies to disclose emissions, but requires information that will give investors an "important window" into companies' approach to climate risk.

"Up until now, most companies that felt they had something positive to say about their climate risk approach have included that information in a separate sustainability report," Malone said. Now, companies will need to "consider these issues seriously" and be encouraged to build processes to evaluate these risks.

Some Democratic politicians and sustainability-minded investors were disappointed at the absence of stricter disclosures, but differed in their views of how effective the rule would be.

Investor group Ceres said in a statement it was "thrilled with the SEC’s work in crafting a strong rule" although "the regulation notably lacks a mandate for Scope 3 greenhouse gas (GHG) emissions".

But Democratic Senator Ed Markey of Massachusetts said the rules put the U.S. economy at risk. "It means big promises without any real accountability to deliver emissions reductions, despite these same entities having to provide this information in the European Union and in California starting in 2026," Markey said in a statement.

(Reporting by Isla Binnie and Ross Kerber; Editing by Chizu Nomiyama, Barbara Lewis, David Gregorio, William Maclean)