New SEC Ruling Hinders U.S. Legitimacy as Climate Leader
Chesterfield Electricity-Generating Facility in Dutch Gap, Virginia. Photo by Bill Dickinson.
Last month, the U.S. Securities and Exchange Commission (SEC) adopted a ruling that undermines the United States’ position as a climate leader. The new regulations dictate that registrants must disclose the financial effects of certain climate-related risks to company investors, weakening a 2022 climate disclosure proposal by not requiring companies to report all emissions.
The ruling only requires companies to disclose Scope 1 and 2 emissions—direct greenhouse gas (GHG) emissions that come from the company and indirect emissions that come from energy purchased by the company—as long as they are material, meaning investors would find the size of emissions consequential. Most significantly, companies do not have to disclose Scope 3 emissions—emissions that occur upstream or downstream from the firm—which typically account for roughly 75% of total emissions. These incorporate the emissions from shipping parts, the consumer’s use of the product, and emissions from the production of inputs.
Although the SEC is mainly concerned with protecting investors and does not have the power to regulate GHG emissions—that power belongs to the Environmental Protection Agency—it can play a role in promoting sustainable business practices. Similar to a society not closely monitored by a free press, a society without disclosure in climate reporting is one where companies are not held fully accountable for their emissions.
This ruling has led to heated controversy from both sides. Energy companies are suing the SEC under the “major questions” doctrine, a legal theory that contests that only Congress can permit agency action with this kind of political or economic significance. On the other hand, environmentalists say the SEC is not doing enough and are also suing them for “arbitrary removal” of provisions from the 2022 proposal.
Despite the ruling, the future of U.S. climate policy is not entirely bleak. The California Air and Resources Board (CARB) passed more strict laws for security disclosure. Those laws require private and public companies that do business in California that make at least $1 billion in annual revenue to disclose Scope 1 and 2 emissions starting in 2026 and Scope 3 emissions by 2027. It also does not have a materiality qualifier for those disclosures.
Due to California’s immense GDP, it will be hard for companies to avoid doing business in the state, meaning these regulations can force industries nationwide to comply with CARB’s regulations. This pattern can be demonstrated by motor vehicle standards passed in California in the 1970s that encouraged automakers to manufacture cleaner vehicles. Although only cars sold in California had to meet the emissions standards, automakers found it was cheaper to switch to completely designing cars that met California’s standards instead of manufacturing two versions of each car. If the CARB’s laws prevail after upcoming lawsuits—similar to those the SEC faces—the state regulations may be a loophole for emission disclosure regulation to still be enforced despite the SEC ruling.
This ruling will not only have impacts on companies nationally but will also harm the U.S.’ ability to achieve Paris Agreement targets, effectively decreasing their legitimacy as a climate leader. This position has waned in the past few decades as climate change has become increasingly politically polarizing. The European Union and China have already passed security disclosure laws that require companies to report all scope emissions. In fact, legislation around the world is trending toward disclosing Scope 3 emissions—Singapore announced a few weeks ago that it would implement its own emission disclosure legislation that would have this provision. The question remains as to when the U.S. will enact robust enough regulation that would own up to the estimated 427 billion metric tons of carbon dioxide it has released into the atmosphere over time.
As the federal government fails to implement regulations surrounding climate change, other entities are picking up the slack. Many state and local governments are passing legislation to achieve net-zero targets—such as those passed by the CARB—but a unified directive from the federal government would help streamline and quicken the process.
The hope is that with increased transparency, companies will feel pressured to cut back on their emissions and more people will divest from carbon-intensive companies. Divestment, by shifting money away from polluting companies, can speed up the energy transition and stigmatize carbon-intensive companies. Approximately $40.76 trillion has been divested worldwide from fossil fuels and the stocks of many fossil fuel supermajors have fallen in the past 10 years. In addition, increased transparency places the responsibility on consumers and allows them to boycott and protest companies that are harming the environment.
Although many large corporations are satisfied with the weakened ruling, it remains to be seen whether investors will actually benefit from its effects. After all, climate change is worsening and every country will be equally implicated. Short-term profit in continuing to release GHG emissions will only quicken the crisis. The U.S. can either get on board with climate policies and trends, or it can continue to lag behind and worsen conditions for the entire world—both a glaring error in its desire to be a global leader and an abetter in promoting inequality.
Zoe Tseng (BC ’25) is a staff writer at CPR and majors in political science with interests in international relations, the U.S.-China relationship, and the environment. She enjoys being outdoors, chai lattes, and listening to music. She can be reached at zpt2001@barnard.edu.