The SEC’s Final Climate Disclosure Rules: Simpler But Disputed

Tax Notes contributing editor Nana Ama Sarfo discusses the SEC’s recently released carbon pricing disclosure rules and their reception from the business community.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: altered carbon.

On March 6, the U.S. Securities and Exchange Commission released its final rules on corporate climate disclosures. The rules require corporations to outline internal carbon pricing if those prices are important to the business. While the rules were changed between their proposed and final form, they still face significant resistance.

So what's so important about these disclosures, and why are they facing opposition?

Here to talk more about this is Tax Notes contributing editor Nana Ama Sarfo. Ama, welcome back to the podcast.

Nana Ama Sarfo: Thank you, David. It's always a pleasure to be here.

David D. Stewart: So to start off, could you tell us about these rules that have come out?

Nana Ama Sarfo: Yes. The rules that the SEC finalized are the SEC's climate disclosure rules, and they require public companies to disclose their greenhouse gas emissions, their climate-related targets, and then also other climate-related disclosures, including their internal carbon pricing. And internal pricing is definitely an issue that our listeners will care about.

So basically, the SEC wants companies to publicly disclose any climate-related risks that are material to their business. And by material I mean risks that can financially and considerably impact their business. And the rules that the SEC have put out are absolutely massive. They clock in at almost 900 pages.

So our listeners might be wondering, why does the SEC even care about company's climate policies and their greenhouse emissions? And here, I think that a quote from SEC Chair Gary Gensler provides the why here. And when the SEC released the climate disclosure rules, he said the following, he said, "Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called 'complete and truthful disclosure.'"

So when the SEC first proposed these rules about two years ago in 2022, it said that it was responding to feedback from investors. And investors were saying that they want climate-related disclosures so that they have better information about the climate risks that companies are facing, and also whether they are responding to those in appropriate ways. And the SEC wanted to make this information easier for investors to obtain and also understand. And that's because there currently are a lot of different voluntary climate disclosure frameworks out there, but the space has really become clogged with all of these different standards. And the SEC felt that perhaps it was best to have a streamlined rule and that they were best placed to enable that.

David D. Stewart: Now, what changes did we see between the proposed and finalized rules?

Nana Ama Sarfo: I had mentioned that the final rules are almost 900 pages. And given that, you might be surprised to learn that the final rules are actually much more watered down than the proposed ones. So in some cases, the SEC had to strike entire provisions after getting feedback from the business community. One really notable change is that the SEC had wanted businesses to disclose three different types of greenhouse gas emissions. And now in the final rules, businesses will only have to disclose two different types. And then, in other cases, the SEC wanted to make the rule simpler and ease compliance burdens for reporting companies. And we definitely see that in the case of the internal carbon pricing provision.

So as I had mentioned, that provision is really going to be important for the tax community. And under the rules, companies that calculate an internal carbon price are required to disclose that price and how it was set if that pricing is material to their business. And here, the SEC is defining an internal carbon price as an estimated cost of carbon emissions used internally within an organization.

So in 2022, the SEC had wanted companies to disclose four different pieces of information. They wanted to know the price per metric ton of carbon dioxide equivalent, their total carbon pricing, including how it's estimated to change over time. They wanted to know the boundaries that companies are using to make these measurements. And they also wanted to know the rationale for selecting their internal carbon price.

But now under the final rules, companies will only have to disclose two pieces of information. So that's the price per metric ton of carbon dioxide, and then the total price and how it's estimated to change over time. But one other thing that companies will have to disclose is if they use more than one internal carbon price, they'll have to disclose each and then also explain their reasons for using different prices.

David D. Stewart: Now, these rules sound like they've gotten easier to abide by. So why are they controversial? What are companies afraid of here?

Nana Ama Sarfo: Well, they're controversial for a few different reasons. I would say largely companies are concerned that the rules are too burdensome, particularly the provisions for reporting greenhouse gas emissions. They're also concerned about compliance costs. They think that they probably will be too expensive to comply with. Some are concerned that the disclosure rules violate their First Amendment right to free speech.

So the argument here is that they're unconstitutionally being mandated to make these disclosures. Others have also argued that the SEC is trying to make them disclose confidential information that could pose some risks to their business. So companies are clearly concerned about a lot of different things. And when the SEC released the proposed rules, it had asked the public to weigh in, and it received a historic amount of feedback: about 5,000 comments from businesses, trade associations, and the like.

David D. Stewart: Are companies worried about some sort of liability from making these disclosures?

Nana Ama Sarfo: Yes, that is a concern. And there actually is a safe harbor within the rules that protects companies from facing the liability that you mentioned. It protects companies from making any forward-looking statements about what they expect to happen in the future. And so when the SEC was finalizing these rules, they had to decide whether it would include the internal carbon pricing provision within that, because those disclosures may contain both facts and then also forward-looking statements.

The final rules do insulate companies that do release their internal carbon prices, and that's a good thing. Including that data within the safe harbor means that companies will be able to freely disclose it without fear of litigation. And that's really huge because we're seeing a rise of "greenwashing" lawsuits. Investors and consumers and also states are really closely scrutinizing the promises and statements that companies are making about their climate policies, and they're suing them if the statements don't appear to match reality.

David D. Stewart: And why do people care about company's internal carbon pricing?

Nana Ama Sarfo: That's a really good question. The SEC considers internal carbon pricing to be a key data point for assessing how well a company is managing its climate risks and also how well it's planning for future ones. I would say, from a business standpoint, that internal carbon pricing is important and useful for them for several reasons. So in some instances, they use carbon pricing to identify climate-related risks and opportunities. They also use carbon pricing to identify areas where they can generate energy efficiencies and reduce their costs. Internal carbon pricing is also useful for making capital investment decisions in forecasting their potential costs in the case that a national carbon price is implemented.

And I will say, in terms of a national carbon price, that internal carbon pricing data can be really useful for policymakers because if you want to put a price on carbon and try to reduce emissions, you need to know the kinds of prices that companies are using internally. And we don't have a global carbon price or any sort of international coordination on carbon pricing. So these standardized disclosures could be really helpful for policymakers who want to pursue that in the future.

David D. Stewart: Is there any sense of how companies are pricing their carbon currently?

Nana Ama Sarfo: Well, from what we know from voluntary disclosures, carbon prices vary wildly — I think from less than a dollar per metric ton of carbon dioxide to upwards of $1,600 per metric ton.

David D. Stewart: And what sort of reactions have we seen from the business community since these rules were finalized?

Nana Ama Sarfo: We have seen a slew of lawsuits over the past few weeks, and they've been filed by businesses, business interest groups, state attorneys general. Nearly 20 states have sued the SEC over the rules. And then, also, some environmental groups are entering the ring, and they have sued as well.

David D. Stewart: What are they arguing?

Nana Ama Sarfo: Some believe that the SEC overstepped its authority in creating the rules. Some fracking companies have sued the SEC on that basis. As far as the state lawsuits are concerned, some states have argued that the rules are too burdensome and could hurt their supply chains. Some of them also believe that the SEC overstepped its authority. The U.S. Chamber of Commerce has sued, and they have argued that the SEC is essentially trying to micromanage companies. And then, on the other hand, we have some stakeholders who believe the rules are too weak. So the Sierra Club has said that the disclosure rules won't actually provide investors enough information to make informed decisions, and they think that the rules should be stronger. So they've sued on that basis.

David D. Stewart: And when are we expecting to get any kind of answer on these lawsuits?

Nana Ama Sarfo: As far as the state lawsuits are concerned, they recently were consolidated, and the Eighth Circuit will be taking those cases. But right now everything is pending. The climate disclosure rules were recently stayed within the Fifth Circuit, but then the Fifth Circuit removed that stay. So right now they're in operation, but facing a wide array of lawsuits.

David D. Stewart: So what's next for this type of disclosure? I'm assuming that it'll be a while to see this sort of thing play out, but where do you expect things to go?

Nana Ama Sarfo: Well, moving forward, I think there are three things that could happen. Either the rules could be narrowed, they could be completely struck down, they could remain the same, or they could even be expanded because, as I mentioned, some have complained that the rules are actually weak. But I think that for now we should expect that starting around 2026, that public companies will be disclosing their internal carbon prices and also some data about their greenhouse gas emissions. And so from there, we should have a clearer picture of their climate risks and how they are addressing those.

David D. Stewart: Well, Ama, thank you so much for being here. This is definitely an issue that we're going to have to keep an eye on for, I'm guessing, a good long while.

Nana Ama Sarfo: Absolutely. And it'll be a fun one to watch. So thank you for having me on the podcast.