The SEC is Jumping In to Climate Change

On March 6, the Securities and Exchange Commission, i.e. the SEC, the primary regulator of American investment in stocks and, in my opinion, one of the most important regulators in the world, issued a new “final rule” titled, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” On April 4, it stayed the rule, in other words declared that it won’t implement the rule yet. I put “final rule” in quotes not so much to draw attention to the fact that it might not in fact be final (Though don’t you think it probably isn’t exactly final? Lol.), but rather because the SEC has classified this issuance as a “final rule” as opposed to a proposed or interim rule. This rule is controversial and has been in the works and widely discussed for some time now. You can find the codification here: For a while now, many businesses that publicly report financials, which mostly means those that are owned by many individual investors, have been including data and statements about climate change in some of their statements. But most haven’t and there’s been a wide variety in how those that do so do. For example, some make those statements in financial statements, sometimes SEC statements like 10ks, and some do it only outside of them.  A wide consensus has formed that businesses face serious risks from climate change, but there isn’t a consensus on what to do about that. The controversy goes far beyond the jurisdiction of the SEC. Way back in December 2022, former Vice President Al Gore was highly critical of Vanguard when it left the world’s largest climate finance coalition.  The article is here: With the new rule, the SEC is not so much wading into the controversy as it is, proverbially, jumping in. But it didn’t really have a choice.

Here’s a rundown of the rule. It requires disclosure of climate-related risks that have materially impacted or are likely to materially impact a company’s business strategy, profits and growth, or financial condition. (In this context, materially basically means significantly.) Publicly owned companies , i.e. those that are owned by many individual investors, will be required to report “scope 1” greenhouse gas (GHG) emissions, which come directly from their operations, and “scope 2” GHG emissions from energy purchases if they are considered of material interest to investors. It also requires disclosures related to severe weather events and other natural conditions. The originally proposed rule required disclosure of “scope 3” GHG emissions, defined by the EPA as, “The result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain.” In other words, scope 3 emissions are those made by suppliers making what they supply to you and those that customers would be expected to emit by use of your products. But the final rule only requires disclosure of scope 1 and scope 2 emissions, much to the disappointment of environmentalists. The lack of a scope 3 requirement was partly because of pressure from business and Republican legislators, but many of those affected agree that quantifying those emissions would have been very difficult, expensive, imprecise and probably inaccurate.

The controversy is far from settled. A coalition of ten states filed a legal challenge to the rule. Patrick Morrisey, the attorney general of West Virginia, one of those states, called the rule, “illegal and unconstitutional.” I’m not surprised that he thinks so given that his state has a lot of coal mines. The critics are many. Former SEC chair Jay Clayton, said, “Are companies reporting risks (related to climate change) in precisely the same way or with the same metrics? No, probably for a good reason which is different companies in the same industry and certainly companies in different industries face very different risks.” But there are many defenders of the new rule too. Asaf Bernstein, associate professor of finance at the University of Colorado at Boulder said, “Voluntary reporting is all over the map. Standardization is something you can use as a decision tool as an investor.” I don’t know if this includes Prof. Bernstein, but I’m sure many of the rule’s defenders, probably some of whom don’t think of themselves as environmentalists, hope this rule is only the beginning of standardization of climate change reporting. This article from the Wall Street Journal provides more good information:

I’d love to go more into my own opinions about which, if any, rules should be created and implemented and the other details of the controversy. But I’m a businessman. If you want my opinions, let’s get to know each other first. A good start would be contacting me to talk about how my team and I can help you achieve the goals and dreams you have for your business!

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