The U.S. Securities and Exchange Commission (SEC) is facing pushback across the energy sector after issuing a draft rule that could require public companies to disclose more information about their emissions and their strategies.

CO2 emissions

In a 3-1 decision earlier this week, the SEC voted to propose a groundbreaking rule that would force companies to intimate their greenhouse gas (GHG) emissions and what risks climate change might hold for their future.

If approved, the rule would codify risk mitigation plans and disclosures that some companies, including the energy industry, have been voluntarily creating. Information that would be required under the proposal is split into four areas: governance, strategy, risk management and metrics/targets.

Among other things, companies would be required to measure Scope 3 emissions, generally produced by customers, if they are “material,” or if a company includes Scope 3 in its targets for abating emissions. Companies generally provide figures for Scope 1 and 2 emissions. Scope 1 refers to direct GHG emissions, while Scope 2 is associated with the company’s purchase of electricity, steam, heat or cooling that it uses.

Democrat and SEC Chair Gary Gensler said the enhanced disclosure proposal provides “clear rules” that benefit both investors and companies. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”

Republican Commissioner Hester Peirce, who voted to oppose the draft rule, said it would “undermine the existing regulatory framework that for many decades has undergirded consistent, comparable and reliable company disclosures.”

Call For Clarity

Energy industry associations and business advocates expressed concern about the broad proposal. Some said it could introduce more volatility to the market rather than actionable information for investors.

The American Petroleum Institute’s (API) Frank Macchiarola, senior vice president of policy, economics and regulatory affairs, said he hopes the SEC will take a look at the U.S. industry’s successes with sustainability reporting and collaborate with stakeholders to craft an effective final rule.

“We are concerned that the Commission’s sweeping proposal could require non-material disclosures and create confusion for investors and capital markets,” Macchiarola said.
API has advocated for climate policies, opting to push for partnerships to strengthen the energy industry’s position in the transition to net zero emissions.

In January, API CEO Mike Sommers said the group expected more wins on policy through the year as corporate leaders increased collaboration with regulators.

The American Chemical Council (ACC), which represents the U.S. petrochemical industry, a leading consumer of natural gas, supports the disclosure rule, with a caveat.

ACC CEO Chris Jahn said the group supported a pathway to disclosure. He also insisted regulators look at what third-party standards are in place by focusing on industry-specific goals and challenges.

“An effective climate disclosure program must strike the right balance among investor protection, the production of decision-useful information, and cost burden to companies,” Jahn said.

The U.S. Chamber of Commerce shared concerns about the proposed rule, particularly regarding the Scope 3 disclosures. Executive Vice President Tom Quaadman of the Chamber’s Center for Capital Markets Competitiveness, said U.S. businesses have proven to be global leaders in environmental, social and governance. The “market dynamics” have made it essential for most businesses to satisfy stakeholders.

However, if the rule is too broad, Quaadman said the proposal could confuse investors and ultimately derail momentum.

“The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad,” Quaadman said.

Activists Respond

Climate-minded activist investors were cheered by the vote, but also had goals for influencing the final rule.

The Interfaith Center on Corporate Responsibility (ICCR), a coalition of more than 300 faith-based institutional investors that hold a combined $4 trillion in assets, said it ultimately expected the rule to be strengthened before final approval. In a mirror of industry groups, the coalition wants to determine what the definition is for “disclosure.”

ICCR is looking for requirements that ensure a company meets “environmental justice metrics that investors increasingly seek.” It also wants Scope 3 emissions disclosures to mean companies would measure and abate community impacts.

The Sierra Club called the disclosure guidelines an overdue protection to make sure companies aren’t moving the goalposts on carbon reduction. “This is especially important given how many companies have made commitments to address their climate impact without disclosing the full scope of their emissions, the risks their own businesses face from climate change or the relevant business plans to achieve their climate pledges,” spokesperson Ben Cushing of the Fossil-Free Finance Campaign said.

What’s Next?

Jefferies Group LLC analysts noted the SEC’s guidelines were similar to the framework laid out by the Task Force on Climate-Related Financial Disclosures (TCFD). While the SEC is using TCFD-aligned policies, Jefferies analysts don’t expect the rule to rise to that of the European Union’s requirements.

Even if the policy is less intense than that of other governments, ClearView Energy Partners LLC said disclosure for publicly traded companies would have a cascading effect for the entire corporate landscape, especially in energy. Although some companies may not be directly impacted by disclosure, analysts noted that larger companies would likely include Scope 3 disclosures if they were connected in the value chain.

With wider data sets available for consumers, insurers, governments and activists to use, ClearView analysts foresee disclosure potentially impacting future business choices for companies with the most climate exposure.

“These dynamics could potentially accelerate emissions-intensive firms’ adoption of lower-carbon technologies,” analysts said.