By a 3–2 majority (the two Republican commissioners dissented), the SEC has approved new rules imposing climate-related disclosures on public companies. These will take effect for large companies from 2026 and for their smaller brethren from 2028.
Large public companies, around 40 percent of the total, will have to disclose material direct greenhouse-gas (GHG) emissions, including emissions generated to produce the electricity they use. Midsize companies will be treated more lightly. They will “merely” be required to disclose the GHG emitted by the generators of the electricity they use. The smallest public companies will be spared any obligation to disclose such emissions.
These obligations incorporate two important climbdowns by the SEC. The first is that only “material” direct GHG emissions need to be disclosed. The second is that companies’ disclosure obligations are confined to direct emissions. Earlier, the agency had suggested that companies’ indirect emissions should be included too. These range from the emissions generated by third parties making items that a company incorporates in its end products to the emissions generated by customers using those end products.
Gathering the information necessary to make such disclosures would have been an administrative nightmare. It would also have forced nonpublic (and generally smaller) companies to supply the information required by the SEC or cease doing business with any companies caught within the SEC’s dragnet.
These concessions may only be a respite. Disappointed climate activists will be pushing to turn the ratchet further as soon as politics permit.
Public companies already have to disclose material risks, but they will also be obliged to disclose the extent to which climate change could pose significant risks to their business. Such risks are widely defined and can include legislative, regulatory, and legal threats. Additionally, companies are forced to state what they are doing to reduce such risks and the progress they have made. This will, as is almost certainly the intention, open a promising new front for lawfare. The question whether a company’s GHG emissions or climate risk are material enough to be disclosed (or, if indubitably material, have been disclosed enough) will offer rich pickings for activists and the lawyers who feed off them.
Like the FDA’s proposed regulations that would place heavy new restrictions on the sale of new “traditional cars,” the SEC’s imposition of these disclosures is another example of the reliance of climate policy on regulatory mission creep, a development that is bad news for democracy as well as for business and consumers.
And the economic effect of the SEC’s new regulations will be malign. The new regulations may be less onerous than originally proposed, but they will still impose a heavy administrative burden (and thus costs) on companies. This will hit profitability and therefore pose a threat to jobs, except, of course, to those of the lawyers, accountants, and “consultants” hired to assist companies to comply with the new regulations.
This new regulatory burden will tempt managements to err on the side of caution and, as they frequently do in other areas of potential legal risk when the SEC is watching, to “overdisclose.” But, once companies disclose that climate risk is material, the new regulations will, as stated above, oblige them to disclose what they are doing to mitigate it. And here too they will find their actions being second-guessed by plaintiffs driven by climate fundamentalism rather than the interests of the company’s shareholders. This will mean that, as in the case of ESG, the demands of climate activism will trump the shareholder primacy that has served the U.S. so well.
A coalition of ten states has already filed suit against the SEC, arguing, among other claims, that introducing these regulations goes beyond the authority the agency has been granted by Congress. It is to be hoped that this suit succeeds. It would be even better, however, if a future administration or Congress sweeps these rules away.