(Bloomberg) — The Securities and Exchange Commission will force companies to disclose their greenhouse gas emissions for the first time, but dropped a key requirement after heavy lobbying by industry groups.

The SEC voted on Wednesday to impose The climate disclosure requirements will be significantly more relaxed than those it proposed in March 2022 after the agency received thousands of comment letters and numerous legal threats over the plan. In the biggest change, the regulator will not force companies to quantify pollution from their supply chains or customers, known as Scope 3 emissions. In addition, firms will face a higher bar when they have to disclose more direct carbon footprints in their regulatory filings, which are known as Scope 1 and Scope 2 emissions.

The vote to finalize the regulations caps months of intense debate within the agency and in the halls of Congress over what has been billed as one of Washington's signature efforts to tackle climate change during the Biden era. Following the rule, SEC Chairman Gary Gensler has been accused by opponents of seeking to expand the commission's jurisdiction beyond securities into climate matters.

Gensler has strongly disputed this claim, arguing that many investors want information to guide their decisions. Currently, publicly traded companies use a non-standardized mix of voluntary metrics.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions based on that information,” Gensler said in comments about the meeting. “It is in this context that we have a role to play in relation to climate-related discoveries.”

Complicating the situation are different requirements around the globe and in at least one US state.

The SEC's regulations aim to address that by — for the first time — providing basic federal requirements for companies to discuss the business risks and opportunities associated with a changing climate. Regulations can also make it easier for investors to compare the environmental impact of firms in the same industry.

'Main Audience'

Cynthia Hanawalt, director of the financial regulation practice of Columbia University's Sabin Center for Climate Change Law, said there are huge financial risks and opportunities associated with climate impacts and the clean energy transition. “Investors are the main audience,” she said.

However, the SEC's requirements will be significantly less stringent than regulations passed last year by California lawmakers and European Union requirements. For example, California's emissions disclosure law requires large public and private companies doing business in the state that generate more than $1 billion in annual revenue to publicly disclose Scope 1 and Scope 2 emissions annually beginning in 2026 and field 3 emissions in 2027. The state regulations are already being challenged in court.

Read more: California Goes Before SEC on Firms' Carbon Disclosure Obligation

Ben Jealous, executive director of the Sierra Club, an environmental advocacy group, said the SEC rule was a positive step, but the omission of the Scope 3 disclosures means it “falls significantly short of what is needed.”

“Allowing companies to continue to hide a full accounting of their climate pollution keeps investors, including the Sierra Club and our members, in the dark about critical information needed to make informed choices about companies' financial risks.” ,” said Jealous.

Under the SEC's final rules, publicly traded companies will have to tell investors about the actual or potential material impact of climate-related risks on their business strategy, model and outlook. The addition that certain information must be “material” that companies must include it is also a significant change from the proposal. In practice, this limits these disclosures to what is considered relevant to decision-making by a reasonable investor.

Companies will also need to disclose climate risks that could harm their operations or financial conditions, such as those caused by sea level rise, hurricanes, droughts or wildfires. Companies that take steps to minimize or eliminate such risks must also report them.

The agency's three Democrats voted in favor of the rule, while the two Republican commissioners opposed it.

Commissioner Caroline Crenshaw, a Democrat who has pushed for a stronger version of the climate rule that includes Scope 3 disclosures, expressed disappointment with the final rule despite supporting it. “Given our clear authority, going back on the proposal is a missed opportunity,” she said. Crenshaw said more rigorous disclosure requirements could be introduced in the future.

Republican Commissioner Hester Peirce said any additional information would “overwhelm investors, not inform them.” Peirce said companies are already required to disclose material risks to investors as part of its counterclaim.

Opposition from business groups to the plan, which the SEC released in March 2022, focused on Scope 3 emissions. Environmental advocates say pollution makes up the bulk of a company's carbon footprint, but many in the industry say that they are difficult to quantify and may give a false impression of a company's environmental impact.

The proposal became a political lightning rod on Capitol Hill once groups like the American Farm Bureau Federation complained that small food producers would be forced by their customers to measure and report their emissions under the plan.

Legal Challenges

It's unclear whether the decision to repeal Scope 3 in the final rule and the other changes will be enough to fend off legal challenges from industry groups and attorneys general in more conservative states like West Virginia. In turn, the regulations could lead to lawsuits from environmental activists, who wanted the SEC to take a stricter approach.

Read more: SEC Climate Rules Face Growing Legal Risk from Green Groups

Despite the changes, the committee's vote was controversial and divided along party lines. The rule will take effect two months after it is officially published in the Federal Register.

Compliance will be phased in over time, depending on the size of a company and the type of disclosure. Large companies will have to start reporting their greenhouse gas emissions in 2026 and smaller ones will have to start reporting in 2028. Smaller publicly traded companies will be exempt from scope 1 reporting and 2.

The SEC is also planning to give the green light to a new rule on Wednesday to require stockbrokers who work with retail investors to disclose more information on the pricing and execution of trades as part of a broader review that is being advanced by the regulator.