Make Hydrogen Happen

Here’s What’s in the SEC’s Climate Rule and Why It Matters 


By Ed Ballard


SEC Chair Gary Gensler says the new rule will give investors critical information.

The Securities and Exchange Commission has published its long-awaited rule on climate disclosures.

This rule has been the subject of intense lobbying for about two years, and its opponents are expected to try to overturn it, as the Journal’s full story notes. Here’s the lowdown on what the rule means for investors, companies and the climate.

What does the rule do?

It requires listed companies to estimate their greenhouse-gas emissions and detail how climate-related risks—including floods, wildfires and carbon regulations—could affect their businesses. The rules will be phased in gradually. 

Who benefits?

The SEC says the rule will help investors assess how climate change could affect companies.

The disclosures could also help companies themselves identify risks, and inform consumers about the environmental practices of the businesses they support.

The SEC has estimated that compliance would cost an average $640,000 in the first year for a large company. Supporters of the rule say that’s a negligible price, and well worth the value of making information public. Some business groups and other critics say the actual costs could be far higher.

Of course, one company’s costs can be another’s revenue; many audit and data firms are offering to help manage these disclosures.

Will it help the climate?

More disclosure could nudge companies to cut their emissions. Significantly, some disclosures will eventually have to be assured, like financial statements, and there’s some evidence that companies with audited emissions data pollute less.



Do other countries do this?

The SEC was a leader when it proposed this rule in March 2022, but regulators in Europe and California have since passed their own rules. Facing investor pressure, many big U.S. companies have started disclosing their emissions to get ahead of the various regulations.

Why does this matter, then?

The SEC’s rule should improve the overall quality of information and make it easier for investors to compare companies. Already, the mere prospect of a rule from the world’s top financial regulator has prompted investors to demand disclosures and regulators elsewhere to act.

What took the SEC so long?

It’s easy to criticize; you weren’t the one processing 16,000-plus comment letters. After the onslaught of feedback, the SEC dropped a key aspect of its plans.

What changed?

The change involved which emissions companies are required to estimate. The SEC’s requirement for what are called Scope 1 and 2 disclosures, covering companies’ operations and energy consumption, was weakened. Companies only have to disclose that information if they consider it material to investors.

Companies also won’t have to account for the most contested category. Scope 3 includes companies’ indirect emissions, such as from suppliers and customers. With an oil company, for example, they would include emissions from drivers burning gasoline.

Opponents say these estimates are too wishy-washy to be mandatory (though other regulators have embraced them). This is a blow for environmental advocates, who say Scope 3 gives a fuller picture of companies’ carbon footprints.

What happens next?

A coalition of 10 states, including Georgia, West Virginia and Alaska, has already filed a legal challenge to the rule. Cynthia Hanawalt, an expert on climate-related financial regulation at Columbia University, expects efforts to overturn the rule to use three legal arguments.

The first two say that the SEC is restricting companies’ freedom of speech and exceeding its authority. The third is that the rule violates a principle, recently adopted by the Supreme Court, that says regulatory agencies need congressional approval for rules that are deemed to expand their authority.

Hanawalt doubts that the first two arguments will sway courts. Whether the third can is less clear, since it’s relatively new.