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The U.S. Securities and Exchange Commission is reportedly circulating a final draft of its climate-related disclosure standards, indicating that a vote on the long-awaited proposal is imminent. If adopted, the CRDS would require publicly traded companies to disclose greenhouse gas emissions and other environmental issues as part of their annual filings with the SEC. If adopted in 2024, the new requirements would come into effect in 2026, but political and legal challenges are expected.
First proposed in March 2022, the CRDS is part of a global framework of sustainability reporting standards. Although the final rule has not yet been published, the draft rule adopts three levels for reporting greenhouse gas emissions. In general, Scope 1 focuses on a company’s direct GHG emissions, while Scope 2 reports the GHG emissions of the energy providers used by the company. Scope 3 focuses on his GHG emissions along the supply chain, including private companies that sell to publicly traded companies and end consumers. The most controversial are Scope 3 and Regulation SX.
Scope 3 is problematic because it requires public companies to seek information from private companies. This creates indirect regulation of private companies outside of the SEC’s regulatory authority and is unlikely to withstand legal challenge.
I think the SEC’s workaround would be to make Scope 3 optional and let each company decide for itself whether disclosure is material. Materiality is based on a company’s decision as to whether something is relevant to investors. This gives the company wide discretion. However, it is mandatory if a company makes public commitments regarding Scope 3 emissions.
Regulation SX, also known as the footnote requirement, requires companies to amend prior year disclosures via footnotes to account for severe weather events and the costs of transitioning to sustainability. Little is clear about the future of this requirement.
The final adoption of the CRDS was delayed multiple times due to growing opposition to sustainability reporting standards and the broader environmental, social, and governance movements. The SEC has been particularly silent on the timeline. Proponents had hoped the rule would be adopted in early 2023, but experts ultimately said October 2023 was the expected date. However, it was eventually revealed that he is most likely to arrive in early 2024.
The final draft of the proposal is now being circulated to commissioners for consideration, according to Politico’s Declan Harty. If his sources are correct, this indicates that the vote will take place sometime in the first quarter, perhaps in March.
The regulations adopted in 2024 are scheduled to enter into force in 2026, which is in line with other global developments in this area, including the European Union’s European Sustainability Reporting Standard. Nationally, California is using the same timeline to develop its own reporting standards.
However, the SEC’s passage is not the final word on this development. The Republican-controlled House is expected to use its oversight powers to repeal the rule. The timing of that action is most likely tied to the 2024 election and the likelihood that Republicans will retain control of Congress and gain control of the White House. The rule won’t go into effect for nearly two years, so Congress could wait to repeal it until after the election. If they act now, President Biden will most likely veto it, as he did when Congress overturned a Department of Labor rule allowing ESG considerations in retirement plans.
Additionally, multiple legal challenges to the rule are expected from Republican-controlled states as well as the U.S. Chamber of Commerce. There is a strong legal argument that the SEC is overstepping its legal authority by enacting this type of rule. Given the U.S. Supreme Court’s current coolness and constitutionalist approach to devolution, the legal challenge is likely to prevail to some degree.
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