SEC backs down on Tier 3 GHG disclosure issue

In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules to improve and standardize climate-related information for investors. Under the new reporting requirements, public companies would have to disclose their Tier 1 (direct emissions from sources owned or controlled by the company), Tier 2 (indirect emissions arising from the consumption of purchased energy) and Tier 3 (indirect emissions upstream and downstream of the company's value chain) greenhouse gas (GHG) emissions.

On the announcement of this proposed regulation, SEC Chairman Gary Gensler stated that, if adopted, it would "provide investors with consistent, comparable and decision-useful information". He added that "investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions."

Nearly two years later, we can see that the climate crisis is worsening, and that responsible investors are continuing to call for better climate disclosure by companies. Despite this, the SEC is set to slash some of its most ambitious requirements. Reuters revealed on February 22, 2024 that, according to sources close to the matter, the SEC has removed the requirement for companies to report their Tier 3 GHG emissions from its proposed regulations. Yet these account for most of their emissions – over 70% of the carbon footprint of most companies, according to consulting firm Deloitte. In the absence of data on these emissions, it is impossible to get an accurate picture of a company's contribution to climate change.

The SEC's retreat on this issue may be attributable to lobbying by many companies and their trade groups to water down the disclosure rules, as well as to the fear of a legal challenge that could reduce the SEC's room for maneuver when drafting further rules. Reuters points out that these concerns would be fueled by a U.S. Supreme Court decision in 2022, which limited the power of the Environmental Protection Agency (EPA) to regulate GHG emissions.

Hopefully, the SEC will reconsider its decision before the new rules are adopted. Nevertheless, some companies will still be required to report their Tier 3 GHG emissions. The European Union's rules on the publication of sustainability information by companies, which came into force on January 5, 2024, do indeed require large companies to disclose these emissions. From 2027, companies operating in California will also have to disclose these emissions. Finally, once again this year, responsible investors will be working with companies to ensure that they disclose their carbon footprint as comprehensively as possible.

Sources: Chris Prentice, Isla Binnie, Jarrett Renshaw et Douglas Gillison, "Exclusive: US regulator drops some emissions disclosure requirements from draft climate rules", Reuters, February 23, 2024, ref. February 26, 2024, Exclusive: US regulator drops some emissions disclosure requirements from draft climate rules | Reuters ; AMF, Le reporting de durabilité CSRD : se préparer aux nouvelles obligations, February 7, 2024, ref. February 26, 2024, La nouvelle directive CSRD, tout savoir pour mieux s'y préparer | AMF (amf-france.org) ; U.S. Securities and Exchange Commission, SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, March 21, 2022, ref. February 26, 2024, SEC.gov | SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors