The Securities and Exchange Commission finalized Wednesday, by a 3-2 vote, a rule that will require public companies to disclose their climate risks and their scope 1 and scope 2 greenhouse gas emissions.

Public companies will have to disclose the climate risks material to their business; the companies’ strategies for reducing those risks and related costs; the processes the companies use for managing and identifying climate risks; any losses from severe weather events; and scope 1 and 2 emissions.

Scope 1 emissions are emissions directly tied to a company’s economic activity, while scope 2 refers to emissions that result from a company’s energy consumption. Climate risk refers both to physical risks associated with a changing climate, such as wildfires and floods, as well as transitional risk, which refers to costs that result from the transition away from fossil fuels.

The initial proposal, from March 2022, would have required companies with a specific climate-related goal to also disclose scope 3 emissions, those that are produced in a company’s entire supply chain. This element of the proposal was perhaps the most controversial, especially in the agricultural sector, and was dropped from the final rule.

Reporting Starts for Some Companies Next Year

The new rule has a phased-in compliance date schedule, and small reporting companies—those with a public float less than $250 million—and emerging growth companies are exempt from scope 1 and 2 reporting. Large accelerated filers—those with a public float of at least $700 million—must begin reporting their climate risks on forms S-K and S-X beginning in 2025, and their emissions reporting will begin in 2026. Small reporting companies and emerging growth companies have until 2027 to report climate risks and are not subject to emissions reporting requirements.

SEC Chairman Gary Gensler frequently has explained that the rule will help investors compare companies, many of which already disclose climate-related information, by making the disclosures more uniform. Jessica Wachter, the director of the SEC’s Division of Economic Risk and Analysis, said at Wednesday’s hearing that more than 40% of issuers already disclose information of this kind to the public, but the lack of a common framework “makes them difficult to compare.”

Commissioner Hester Peirce, who opposed the rule, described it as “spam” and “high-priced guesses.” She noted there is no standard method of reporting emissions, and this “will undermine comparability.”

Travis Wofford, a partner in the Baker Botts law firm, agrees that “emissions reporting is just not standardized.” He notes that many companies do already report emissions. For scope 2 tracking, many companies reach out to their power suppliers for estimates, “but you are just reporting back what you’ve heard.”

‘I Would Want to Know This’

Wofford says the rule will create “tough calls for companies,” and it will take time to see what qualifies as a material or severe weather event. The cost of the disclosures will also weigh heavily on smaller companies, and many may be unable to afford them or be deterred from going public due to the costs.

The rule requires companies to report emissions if they are material to the company’s business. Whether or not emissions are presumed to be material will depend in part on which SEC chairman is in place at the time, Wofford says.

Jay Gould, a special counsel at Baker Botts, says of the disclosure requirements, “If I were an investor, I would want to know this.” For example, he says, an investor buying stock in an insurance company “would want to know what their exposure is” to natural disasters and other climate risks.

Gould acknowledges that some smaller companies will struggle to comply, and “this may delay some public offerings.” He adds that, “maybe that’s not such a bad thing,” because “going public means you have to provide the public with information, and if you’re not set up to do that, maybe it’s not time for you to go public.”

Gould adds that he thinks the rule suggests a presumption of materiality for scope 1 and 2 emissions, meaning companies will be expected to report them. In some limited cases, however, some companies may be able to avoid reporting if those items are truly immaterial to their investors.

The Investment Adviser Association, a nonprofit representing fiduciary investment advisers, said in a statement that, “We appreciate the SEC’s decision to prioritize climate-related disclosure rules for public companies before those focused on [environmental, social and governance] factors for investment advisers and funds. This sequential approach will allow investment advisers and funds to have access to climate information from companies that will be necessary to inform related ESG disclosure requirements on them.”

The Interfaith Center on Corporate Responsibility released a statement that, “While ICCR and other financial actors, including Bank of America, Wells Fargo, Vanguard and State Street, all supported the inclusion of Scope 3 emissions in the final rule, and while Scope 3 disclosures in some form were favored by 97% of investors that commented on the rule, Scope 3 reporting is not required by the final rule due to strong opposition from carbon-intensive sectors and their trade associations. Studies show that in many key sectors, agriculture, banking and insurance, retail, auto manufacturing and oil and gas companies among them, the vast majority of companies’ emissions are Scope 3, meaning investors and the financial sector would be missing critical climate risks from these and other similarly configured industries if they are omitted from reporting requirements.”