Bloomberg Law
Jan. 5, 2023, 9:00 AM

SEC Climate Change Rules Will Have Most Impact on Energy Markets

Victor Flatt
Victor Flatt
University of Houston Law Center

In today’s regulatory environment, upstream, midstream, and downstream energy concerns face more information requests and more disclosure requirements.

This year, the energy industry will grapple with government regulations around disclosing information relating to environmental impacts, particularly those related to climate change.

In the US, energy companies will be looking at new methane emissions restrictions, and contending with more reporting on adverse environmental impacts on minority and low-income communities.

The most important regulatory impact will likely come from updated rules from the Securities and Exchange Commission regarding disclosure of climate financial risks information from publicly traded companies.

The SEC’s proposed rule incited strenuous objections from various quarters. However, the final rule is expected to be similar to the initial proposal.

Greenhouse Gas Emissions

The new rule will require all companies to report scope 1 and scope 2 greenhouse gas emissions in addition to other financially material climate risks, such as to infrastructure or from regulation.

Additionally, companies are also to report scope 3 GHG emissions if these are expected to be financially material. Almost by definition, major energy companies would meet the Scope 3 materiality threshold.

Many companies are already gearing up for this reporting, and software is being developed by private concerns to facilitate and ease the reporting burden.

The proposed rule has received significant criticism, prompting particular blowback from Republicans in both houses who have proposed bills to stop or alter the new rules.

These objections are not likely to substantially alter the SEC’s current path because there is no real political way to stop the rulemaking, and the Biden administration and its SEC allies are strongly supportive.

Moreover, the gist of the objections involves clarifying that only “material” risks need to be reported, yet under prior court precedent, the SEC’s proposed greenhouse gas emissions disclosures arguably meet that definition.

Something is “material” if a reasonable investor would want that information in order to make investment decisions.

This is an objective test and isn’t related to whether any particular individual believes that greenhouse gas emissions are significant or important or may affect a company’s bottom line.

SEC Rules

How one views the importance of environmental issues also underlies the other important SEC disclosure rule that may take effect in 2023, which involves information relating to ESG investment practices.

At this point, how a company’s ESG policies are scored is primarily up to private rating companies. And though they have been moving toward some coherence in reporting on some issues, differences in emphasis makes comparing such scores difficult. This makes it difficult to compare how a company’s ESG practices improve the bottom line.

This was the major motivation for the SEC’s climate disclosure rule, which requires information that could allow for logical comparisons.

Though ESG investment practices most directly concern investment funds and brokerages, it will indirectly affect how energy companies are valued. Expect energy companies in every sector to begin to tailor their public information and reporting to fit whatever demands are made from ESG investors.

Tailoring to ESG scoring is how a company such as ExxonMobil beat out Tesla in the S&P 500 ESG Index.


Each of these disclosure rules also impacts the ethical stance of attorneys who represent large greenhouse gas emitters. ESG disclosure accuracy has already become a potential minefield for attorneys to monitor. The Federal Energy Regulatory Commission is proposing more stringent guarantees of accurate information in its proceedings.

Internationally, tightening and standardization of climate disclosure rules will also be the most significant regulatory impact in the world’s other large market economics.

EU member disclosure requirements continue to gather strength, and Australia is likely to adopt standardized greenhouse gas emissions reporting as well in 2023.

Energy operators in some parts of Europe may also face new regulations requiring disgorgement of windfall profits or price controls depending on how high fuel prices go over the winter.

The coming year will also see tighter rules from the Biden administration governing methane extraction on public and private lands.

The administration is proposing that venting be banned, that significant limits be put on flaring on public lands, and that methane detection equipment and repair be required for the whole industry. While these rules are not yet finalized, field operators should expect monitoring and reporting requirements in the coming year.

New energy infrastructure construction in the new year will also likely face more scrutiny directed at environmental impacts on low-income and minority communities under the Biden administration’s strengthened approach to environmental equity.

The administration has started introducing information disclosure on such impacts across a wide range of regulated entities.

The new year will see serious changes to the regulatory landscape. Companies are well-advised to take proactive action now.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Victor B. Flatt is Dwight Olds Chair in Law and the faculty co-director of the Environment, Energy, and Natural Resources Center at the University of Houston.