Companies and investors must now disclose climate-related risks, as the SEC approves a new rule.

• On Wednesday, the SEC approved new rules that mandate most publicly traded corporations to include climate-related risks in their registration documents and annual reports.
• The SEC extended the public comment period for the rule proposal several times, which was first made in March 2022.

On Wednesday, the U.S. Securities and Exchange Commission approved new rules that mandate most publicly traded companies to reveal climate-related risks in their registration documents and annual reports.

Companies must disclose information about climate-related risks that could impact their business strategy, financial condition, outlook, and business model.

The SEC extended the public comment period for the rule proposal several times, which was first made in March 2022.

SEC Chair Gary Gensler stated in his introductory remarks that while the SEC does not have a role in managing climate risk, it does have a responsibility to ensure disclosures related to climate change. He addressed criticism from Republicans and some in the business community that the SEC is overstepping its bounds and should not be involved in the climate change debate.

The SEC has consistently revised its disclosure standards, including those pertaining to environmental hazards, as observed by him.

Nearly 40% of publicly traded companies disclose information about climate-related risk in their annual reports, yet there is no standardized reporting framework.

Hester Peirce, the Republican SEC Commissioner, opposed the proposal, stating that the advantages do not justify the expenses.

The rule will raise the typical external expenses of being a public company by approximately 21%, she stated.

The final rules would require companies to disclose the following:

1. Climate-related risks, including mitigation and adaptation activities related to "material."
2. The impact of natural events and their associated costs on businesses.
3. Any climate-related targets or goals that are material to their business.
4. Processes the company has for identifying and managing material climate-related risk.
5. Information about the board of directors' oversight of climate-related risks.

A rule that has evolved over time

In 2022, the initial proposal required additional disclosure in three categories: Scope 1 for direct emissions, Scope 2 for indirect emissions, and Scope 3 for emissions from supply chains and product users.

Due to pushback from corporations, the final proposal abandoned the Scope 3 disclosure requirement, which they claimed were too burdensome.

The SEC has released new rules that are an extension of the Commission's efforts to provide investors with more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant's business, as well as information about how the registrant manages those risks.