The rule and what it asks from companies
The U.S. Securities and Exchange Commission (SEC) introduced a new rule that connects business performance with climate change. The idea is simple: public companies must tell their investors how climate-related risks may affect their business.
These risks can come in many forms. Storms, floods, wildfires, and extreme heat can damage company assets. New laws and government rules can change how companies operate. Even customer preferences may shift, as people demand greener products. All of these can reduce sales or increase costs.
The rule also makes companies explain how they manage these risks. They need to share who is in charge of handling them. This could be the board of directors or senior managers. The focus is on accountability—showing that someone at the top is watching over climate issues.
Another part of the rule deals with money. Companies must describe how climate risks affect their financial plans. This includes costs of repairing damage, changes in business strategy, or adjustments to accounting numbers. Investors want to know not just what the risks are, but also how they show up in the company’s finances.
Emissions reporting and the scope debate
One of the most discussed parts of the SEC rule is about greenhouse gas emissions. Large companies are required to measure and report their emissions in two main categories.
Scope 1 emissions are direct emissions. These come from company-owned sources, such as factory smokestacks, trucks, or equipment.
Scope 2 emissions are indirect. They come from the energy a company buys, such as electricity, steam, heating, or cooling.
The most debated category has been Scope 3 emissions. These are much broader. Scope 3 covers emissions that occur outside the company’s direct control, such as from suppliers or from customers using the company’s products. For example, the fuel burned in a car after it leaves the showroom would fall under Scope 3.
Many businesses argued that Scope 3 reporting would be too difficult and costly. Collecting data across an entire supply chain can be complicated. After much debate, the final SEC rule did not make Scope 3 reporting mandatory for every company. Instead, it is only required if those emissions are considered “material.” In simple terms, that means if Scope 3 is important enough to change the way an investor looks at the company, then it must be reported.
This decision balanced the need for transparency with the challenge of collecting accurate data. Still, the expectation is that the largest companies, with wide supply chains, may need to pay close attention to Scope 3 anyway.
SEC rule application and current status
The SEC climate disclosure rule is aimed at public companies, especially the largest ones. Smaller companies are given lighter requirements, longer timelines, or, in some cases, exemptions from reporting emissions. The idea is to place the heavier responsibility on the biggest players, since they also have the largest impact.
The rule also introduced a phased approach. This means the biggest companies would start reporting first, followed by smaller ones later. On top of that, independent auditors were supposed to check emissions data after a few years. This was meant to ensure that reports were reliable and not just guesswork.
However, the rule soon faced legal challenges. Several lawsuits argued against it, questioning both the SEC’s authority and the cost for businesses. In March 2025, the SEC decided to stop defending the rule in court. That means the rule technically exists, but enforcement has been paused.
Even though the rule is on hold, many investors still expect companies to prepare. They want clear and comparable climate information. This helps them make better decisions about where to invest their money. Companies that measure emissions and track risks now may find it easier to earn investor trust in the future.
For now, the facts are clear. The SEC rule requires companies to explain climate risks, report on greenhouse gas emissions, and show how leadership manages these challenges. The focus remains on transparency and accountability, especially for the largest public companies. Whether enforced immediately or later, the push for climate-related financial information has already shaped the way businesses think about risk and responsibility.
