A Step in the Right Direction?

By Annie Cerria

On March 21st, the United States Securities and Exchange Commission (S.E.C.) voted to release a proposal to public comment that would require American companies’ annual reports to include information about the climate-related impacts of their activities. According to their official press release on the day of the vote:

“The Securities and Exchange Commission today proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.”

This is the first major step in American history that the S.E.C. has taken to regulate business’ effects on the environment. While, if approved, the ruling could open the door to legal regulations for American companies significantly damaging the environment, the proposal has been attacked for various reasons from both sides of the political aisle. 

Prominent environmental groups have applauded the proposal, acknowledging it as an important step toward giving investors more leverage in forcing changes to business practices that contribute to the rise in global temperatures, among other consequences of climate change. However, some environmental advocates have attacked a specific section of the proposal that they feel leaves too much power in the hands of companies. 

These groups have been attacking the proposal’s regulations on ‘scope-3’ emissions, which the Financial Times describes as, “a broad measurement that includes products a company buys from third parties and business travel as well as the end use of goods sold by the company.” Under the proposal, these would only need to be disclosed to the S.E.C. if they were considered ‘material,’ would not be subject to third-party verification, and would be protected from legal action. 

“We are concerned that scope 3 emissions disclosures are essentially left up to [companies] to determine the materiality of these emissions,” commented Ben Cushing, campaign manager for the Sierra Club’s Fossil-Free Finance campaign to the Financial Times

Environmental advocates have also raised concerns that the proposal is not immediate enough to combat the ever-growing threat of climate change, as the S.E.C. has stated that the earliest that companies would need to disclose their environmental impacts would be 2024. 

From the opposite side of the political spectrum, Republican politicians and groups have also attacked the proposal, but for far different reasons. The Republican commissioner of the S.E.C., the only member of the commission to vote against the proposal, condemned the proposal as a boon for the climate industrial complex, arguing that the regulations would drive up costs for businesses, as well as inflating the value of services from accounting firms and climate consultants. 

Republican Representative Patrick McHenry of North Carolina, who currently serves as the ranking Republican on the House Financial Services committee, also attacked the proposal as: “tone-deaf and misguided.” He then went on to state his opinion that environmental impacts were not a material issue for most American businesses. 

The proposal has also been condemned by more neutral groups, such as the U.S. Chamber of Commerce, for generally being too vague, or for focusing too much on ‘immaterial’ environmental risks of companies’ actions. 

Ultimately, the proposal is a major step toward regulating the environmental impacts of American companies. The increased scrutiny on companies’ emissions will most likely help reduce ‘greenwashing,’ the process by which companies falsify/over exaggerate how environmentally conscious their operations are. It may also encourage companies that have been slow to reduce their carbon emissions to speed up their strides toward net zero. 

However, due to the backlash from both sides of the political aisle, the proposal may not even be passed into law once it goes back up for a formal vote. While the proposal is not perfect by any means and still leaves much action to be taken on regulating emissions giants, as advocates have pointed out, environmental groups and dissidents on the left may want to take what they can get for now. The U.S. government has been famously reluctant to regulate companies that damage the environment, and this proposal may signal the long-awaited reversal of that tradition. 

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Photo by Marek Piwnicki on Unsplash

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