SEC Chair Warns Lack of Climate Rule Exposes Thousands of U.S. Companies to EU Climate Reporting Requirements
The successful establishment of climate reporting rules in the U.S. could potentially help companies facing more onerous climate-related disclosure requirements in other jurisdictions, according to comments by Securities and Exchange Commission (SEC) Chair Gary Gensler at a Council on Foreign Relations event.
Alternatively, the lack of a U.S. rule would be more likely to result in many companies forced to comply with foreign reporting rules such as those in the EU’s Corporate Sustainable Reporting Directive (CSRD), Gensler warned, with the SEC unable to discuss substituted compliance – a system under which companies are seen as satisfying some requirements under one jurisdiction’s rules by complying with comparable rules elsewhere – with its EU counterparts.
The SEC released its proposed climate disclosure rules in March 2022, which would require U.S. companies to provide information on climate risks facing their businesses, and plans to address those risks, along with metrics detailing the companies’ operational climate footprint, and in some cases emissions emanating across their value chains. The comment period for the proposed rule ended late last year, but the Commission has yet to issue a final rule.
While the SEC continues to review its climate reporting rule, other sustainability disclosure regimes are emerging, often with a different or more comprehensive focus than the U.S. proposal, that will apply to many of the U.S. public companies under the SEC’s jurisdiction.
Most notably, the EU’s CSRD rules’ requirements in areas such as Scope 3 supply chain emissions reporting will likely be more comprehensive than the SEC’s requirements, which as proposed would mandate the disclosure only if the company determines that it is material or has made a public commitment regarding its Scope 3 emissions. The CSRD also utilizes a double materiality approach under which companies are required to report on how they expect climate and environmental changes to affect their businesses, as well as the how they impact people and planet.
The CSRD rules would apply to many U.S. companies, as the regulation extends the reporting requirements to non-European companies that generate over €150 million in the EU.
Similarly, California Governor Gavin Newsom recently signed a bill into law which will effectively require large U.S. companies that do business in the state to disclose their full value chain emissions.
In his comments, Gensler said that while the SEC views its climate reporting rules through “the lens of materiality,” and with a focus on how investors would use the information, he noted that “other jurisdictions may be looking at it for other reasons… to lower climate or greenhouse gas. That’s not our remit.”
“If we were not to finalize a rule, or if we finalize a rule and it’s overturned in the courts, either way if we don’t have a rule… some significant number of U.S. companies will have to comply with the European standards – significant number, thousands maybe.
“If we finalize something, even if it’s different than Europe… then we can have some discussions with the Europeans about what’s called ‘substituted compliance,’ possibly.”
While many expected the finalized rule to be released earlier this year, the SEC has yet to set a firm date for its final release, as it deals with the significant volume of feedback it has received on its proposal. Gensler noted that the proposal “got over 16,000 public comments – we never get that. Four or five thousand is a big number, and we often get 200 public comment letters on something were doing.”
Gensler said that he was not announcing when the final rule would be released. A regulatory agenda statement released by the U.S. Office of Information and Regulatory Affairs yesterday listed the current Final Action date for the SEC’s climate rule as April 2024.