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How the US SEC’s New Climate Disclosure Ruling Affects You

It feels like it’s been a long time coming; this week the US Securities and Exchange Commission (SEC) finally “adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. 

While this may feel like a hard-fought win for ESG and sustainability proponents after a long and drawn-out process – the ruling has been subject to multiple delays to its finalization and issuance – the reality is that it has been significantly watered down from its original intent.  

Under the original proposal, large companies would have been required to not only disclose emissions from their own operations, but those emanating from their supply chains as well (known as Scope 3 emissions). In the finalized rule issued by the SEC on March 6, that requirement is no longer present. 

This comes as a blow to the sustainability establishment, as these supply chain emissions often far outweigh a company’s own direct emissions, and ultimately end up contributing substantially more to atmospheric warming as a result. In terms of a ruling originally designed to force companies to be held accountable for their results in this area, one could argue that it has lost its teeth. 

What’s more, companies will only have to report on their direct emissions should they consider them as ‘material’. Notwithstanding the vagueness of the term ‘material’, leaving it up to businesses to voluntarily report on their damaging emissions is probably going to go the way one would expect. 

Naturally, the expected pushback – even on a significantly weakened bill – has begun too. Within a day of the ruling, a coalition of ten Republican states launched a lawsuit in the U.S. federal appeals court, aimed at blocking the rule’s implementation. 

In the suit, the states’ Attorneys General argued that the new rule exceeded the authority of the SEC, describing it as “arbitrary, capricious, an abuse of discretion, and not in accordance with law,” and asked the court to strike down the rule as unlawful. 

This type of statement and backlash comes as no surprise to many businesses and sustainability professionals, particularly those within the United States where over 150 anti-ESG bills and resolutions were introduced across 37 states in 2023 

As for the latest SEC ruling, people are already divided regarding the ramifications of both the ruling itself, as well as the spate of legal action in opposition to it. Some expect it to finally overcome its legal hurdles and pass, whilst others pessimistically foresee more legal delays and see this as just another step on the road to something hopefully more concrete and encompassing in the future. 

Regardless of whether the rule ultimately ‘sticks’ or is delayed yet again, the prevailing sentiment remains that ESG measurement and disclosures will continue to be relevant across various stakeholder groups including customers, international regulators, insurance companies, and investors.  

While major sustainability disclosure laws in the US continue to slowly take shape (though faster in some states like California), jurisdictions and countries elsewhere have begun to enact major regulations where penalties will potentially have material impacts on companies that do not comply, the European Union’s CSRD and SFDR being prime examples of this. 

Investors too, will continue to demand disclosures regardless of regulatory developments and political uncertainty. With financial statements no longer the sole determinant for investment analysis, ESG disclosures are increasingly valued in investment decisions and organizations’ ability to attract and retain financial capital. 

Even small and midsize enterprises (SMEs) will be feeling the pressure to conduct at least some form of sustainability disclosure and reporting to comply with supply chain and/or investor requirements, broaden their customer appeal, and keep up with their business competitors who’ve begun doing so.  

So how will the SEC’s climate disclosure ruling affect you? Probably not as much as you’d feared. If you’re a large company, you’re probably already tracking and reporting on your direct emissions. And SMEs remain unaffected, at least in a primary capacity.  

As we’ve seen however, there are other forces at play within the market which may well affect you far more. It’s probably prudent to take these into account and position your business for long-term sustainability and strategic success, US SEC developments notwithstanding. 

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