Published: March 7, 2024 By

A new rule approved by the Securities and Exchange Commission this week requires large U.S. companies to report on their carbon footprint. The rule, which was significantly watered down from its initial propsal in 2022, requires companies to disclose Scope 1 and Scope 2 emissions—bascially the greenhouse gases a company directly produces and indirect emissions created by energy use. Companies do not have to report Scope 3, another form of indirect emissions, such as the carbon footprint of supplies a company might purchase, or the emissions a product generates once it's in the hands of a customer.

Several Republican-led states have already sued, saying the rule goes too far. The Sierra Club Environmental group says it plans to sue as well—believing the rule does not go far enough. 

Professor Asaf Bernstein with the Leeds School of Business is a former adviser to the SEC and expert in climate finance. He gives his take on what the rule means and what comes next.

Professor Asaf Bernstein.
Professor Asaf Bernstein

What did the SEC do with this disclosure? 

In the current regulatory environment, firms have a lot of discretion in terms of whether they report anything and how they report about climate related risks. This includes both physical risks, like the effects of flooding or potential sea level rise and also transition risks. So as a regulation comes into place, that could affect something like the cost of having excess emissions, these sorts of disclosures are scattershot; all over the place. 

Which means it’s hard to know whether firms are actually doing what we think they're doing or why they're doing it. And whether the goals and targets they've set up to either reduce emissions or manage climate-related risks are actually being managed appropriately, because we don't have a standardized consistent disclosure environment for them. At its core, the question the Securities and Exchange Commission is trying to tackle with this is how to provide consistent standardized disclosures across public U.S. firms. 

Who should be concerned about this issue?

I think all of us should care about this. At the end of the day, if firms are not accountable for the risks they're undertaking and managing, we all lose. When there's no accountability, people can say whatever they want, and it's hard to know where or why they really engage in that action, which diminishes the value of engaging in the action to begin with.

All firms lose from being in an environment with inconsistent reporting. Investors lose, because they don't know what risks they're facing. And then more broadly, all of us as stakeholders lose, because in a world without firms being accountable for the risks they're taking, or the transition opportunities they're trying to seize, firms are less likely to take those opportunities.

How have other countries handled this issue, and what can we learn from them?

In countries who already make firms disclose things like emissions more consistently, you see firms reducing their emissions when they're being held accountable. 

In the U.K. and Europe, when they've implemented standardized emissions disclosure requirements, you see an effect on stock prices. So firms who might have emissions that are worse than expected see a decline in value. That’s a big deal for investors. And when we're thinking about investor protection, about allocation of capital, that is a first order consideration.

These international rules also give us a sneak preview on what to expect in terms of the extremes. So we already know what might happen. And the answer isn't a destruction of capital markets, nor is it going to save the world on its own. But it's a positive step forward. It’s a tool in the toolkit, a step on the journey.

What companies, what firms have to follow this new rule?  

Under the final rule, the vast majority is going to be applied to large public entities, what we'd call large accelerated filers. Large accelerated filers and accelerated filers who would be subject to these rules might make up a third of total U.S. firms. But that third represents something like 95% of market value, which is the total value of their equity. Having comparable metrics for things like emissions versus a cost to the firms themselves is a nice way to strike that balance by going for the largest amount of money but the least number of firms.

Are any companies already doing this? Voluntarily reporting emissions data? 

When we look at the most recent data on voluntary reporting, depending on the type of rule, it can be anywhere from 5% to 45% of companies voluntarily reporting. For something like emissions reporting, the ballpark is one in five firms who are voluntarily reporting. And even when they do, there's a lot of inconsistency in how that reporting occurs.

Also, when we think about voluntary disclosures on climate-related risks, it's very hard to tell why disclosure is happening or not, when it’s happening or not, and the type of disclosure. Because everyone's comparing apples and oranges by not necessarily putting forward the same standard, making it very hard to understand who's actually engaging in climate-related risk management or has climate-related risks that could matter to investors, or the world overall. That’s why having this sort of standard, where you have consistent standardized reporting on these climate-related risks can be incredibly useful. 

How did people—and companies—react to the rule? 

I think a good rule is a rule where people will be angry in both directions. There is no way to please everyone. A rule like this does well when there are people who feel like it went too far, who are reasonable and informed, and people who felt it didn't go far enough, who are also reasonable and informed. 

I think there will be a lot of people excited about the positive step forward, but maybe disappointed it wasn't as big a step as they hoped. There will be members of the community who will be worried it's too big a step forward and wish it had been more incremental. But again, I think that's how you know you're kind of in the right place with a rule like this.