Climate Reporting Enforcement Takes Center Stage

A highly anticipated decision is on the horizon as the U.S. Securities and Exchange Commission prepares to vote on an environmental disclosure rule that would impact public companies. This marks the culmination of a lengthy campaign focused on climate reporting.

Revised Proposal Reflects Compromises

The final proposal put forth by the agency showcases a more narrow approach compared to the previous draft that stirred up significant pushback from various businesses. Additionally, a secondary item to be addressed at the meeting appears to scale back the Commission’s initial ambitious plans for reshaping the stock trading landscape. These modifications hint at a potential limitation on Chairman Gary Gensler’s reform agenda.

What the Environmental Rule Entails

If adopted, the environmental rule would mandate publicly traded companies in the U.S. and abroad to incorporate significant costs linked to extreme weather events caused by climate change into their financial disclosures. Furthermore, businesses would need to divulge their greenhouse gas emissions and their electricity consumption-related emissions.

Adjustments to Address Industry Concerns

To address criticisms from industry stakeholders, the final proposal includes exemptions for companies with a small publicly-held share float under $75 million. Moreover, the stringent requirement from the 2022 draft, which demanded companies to report on the greenhouse gas emissions of their suppliers and customers, has been removed due to practical challenges faced by many businesses.

Implementation Timeline

Assuming approval at the upcoming meeting, scheduled for 9:45 a.m., it is expected that the climate reporting obligations would be phased in gradually until 2033. Larger firms with a public float exceeding $700 million would need to commence climate risk disclosures in 2025, with the obligation to refine their carbon footprint assessments over the subsequent eight years. Smaller companies with floats as low as $75 million would have extended timelines and more relaxed criteria for their greenhouse gas accounting.

Exemptions for Privately Held Companies

Under the revised rule, privately held companies will not be required to disclose climate impacts as part of supplier or merger partner considerations as originally proposed.

Evolution of Climate Reporting Rules

Environmental groups have long been advocating for increased awareness among investors regarding pollution and climate change. The SEC took a significant step in 2010 by providing guidance for public companies interested in making voluntary climate-related disclosures. Fast forward to March 2022, the commission proposed its first mandatory climate disclosure rule in a hefty 500-page draft that sparked a flurry of feedback, both supportive and critical. In parallel, the European Union and states like California established their own climate reporting regulations.

Enhancing Transparency in Stock Trades

Another key item on Wednesday’s agenda is a groundbreaking rule aimed at enhancing transparency in how brokers report on stock trade executions. Retail traders will now have access to reports that reveal which brokers offer them better prices or more shares at a given price compared to others. In instances where a trader opts for a market order with no specified price limit, some brokers and market makers manage to secure stock prices marginally better than those displayed on formal exchanges. While the difference may seem minimal per order, cumulatively, these improvements could result in billions of dollars in savings annually for customers.

Gensler’s Bold Trading Overhauls

The rule concerning order execution represents just a fragment of a comprehensive set of trading reforms spearheaded by Gensler in 2022. Several proposed changes had the potential to significantly alter the trading dynamics among stock exchanges like Nasdaq, Cboe Global Markets, and NYSE under Intercontinental Exchange’s ownership, along with major market-makers such as Virtu Financial and Citadel Securities. Notably, the order-execution disclosures stood out as the sole aspect of the proposals that garnered widespread support from Wall Street.

The existing market reporting system, which has been in place for two decades, has never captured trade quality data on a broker-specific basis, despite efforts to estimate the cost efficiencies provided by popular brokers like ‘s. If approved during Wednesday’s meeting, brokers will be mandated to showcase their order execution performance within approximately eighteen months.

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