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American companies will have to start telling the public about their climate risks

Companies will have to start telling the public how climate change could impact their bottom line — just not in as much detail as some had hoped.

The Securities and Exchange Commission voted Wednesday to approve new climate risk disclosure rules, a significant shift that will require many companies to include information about their emissions, along with the other material risks that U.S. companies must disclose to the public .

Some climate advocates say the rules were weakened after coming under scrutiny from some business leaders. But others say they could still mark a moment when investors wake up to the financial risks of climate change.

The new rules, approved by commissioners on a 3-2 vote, require major publicly traded companies to disclose certain aspects of their carbon footprint and also explain to investors how climate change could jeopardize certain aspects of their operations. Compared to previous draft versions of the rules, the final rules will require fewer companies to comply and will also not disclose most indirect CO2 emissions.

Some large companies already publish such information voluntarily. The new rules could help reduce greenwashing, provide a common standard for disclosures and force major companies to be more transparent, said Cynthia Hanawalt, director of climate finance and regulation at Columbia University’s Sabin Center for Climate Change Law.

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The rules contribute to an ongoing shift in the way climate change is viewed in the business world. What was once considered an abstract scientific question or a threat to the future is now recognized by the regulator and the wider business community.

“For years, climate change was seen as a moral and social issue, and it is only in the last decade that it has become clear how many economic impacts and financial risks are associated with climate change,” Hanawalt said, adding that the rule “is certainly a huge step forward in standardizing this information for investors and requires much more transparency about the risks they face.”

The new rules were proposed in March 2022. They were a lightning rod for the SEC, which said it received more than 24,000 comment letters that it had to review before making a final decision.

The final version of the rule was significantly toned down from the original draft. It no longer requires companies to disclose Scope 3 emissions, which describe indirect emissions such as the greenhouse gases produced to obtain raw materials from a supplier or the emissions created during the end use of a product. That means an automaker doesn’t have to disclose the carbon costs of the steel it buys from a contractor, nor the emissions a car is expected to produce over its lifetime of driving.

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The final version of the rule also limits which companies must disclose their Scope 1 and 2 emissions, which describe greenhouse gases produced directly by a company and those typically associated with energy use.

According to an SEC fact sheet, only large companies — worth at least $75 million owned by public investors — will be required to disclose this information as the new rules are phased in.

For some companies, Scope 3 emissions can represent as much as 90% of their total emissions footprint, according to financial information company S&P Global.

For those types of companies, “you don’t get the full risk picture,” Hanawalt said. “This certainly applies to the fossil fuel industry, but also to sectors such as agriculture and the cement sector.”

Still, Hanawalt said the rule would set a new tone for climate risk disclosure in markets around the world.

“It will impact some of the largest companies doing business in the U.S. and set expectations for global capital markets,” she said.

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In an interview with CNBC, SEC Chairman Gary Gensler said the new revelations will ensure public companies manage their climate goals and emissions targets.

“I think it will help limit and prevent greenwashing,” Gensler said.

The new rules are likely to face legal and political challenges from groups that want stricter disclosure requirements and from those who oppose these types of regulations.

In a statement, Sen. Tim Scott, R-S.C., called the SEC’s rule “federal overreach at its worst” and said he would “fight the rule” using the Congressional Review Act.

The Sierra Club said in a statement that it is “considering challenging the SEC’s arbitrary removal of key provisions from the final rule.”

Hanawalt said legal challenges could take years to materialize.

“The SEC grappled with the risk of litigation as it worked to finalize this rule,” Hanawalt said. “We’ll probably see lawsuits from both sides and we’ll probably see lawsuits in multiple courts. It will be a complicated process in a few years.”

This article was originally published on NBCNews.com

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