SEC Drops Scope 3 Disclosures From New Climate Rule

The Securities and Exchange Commission (SEC), Wall Street's regulatory body, today approved rules requiring publicly traded companies to disclose greenhouse gas emissions and climate change-related risk. In a reversal from the initial proposed rules, which the SEC first published in March 2022, the final rules won't require companies to disclose scope 3 emissions, which refer to those generated within supply chains or in the use of their products. The ruling, which comes after two years of deliberation and 24,000 public comments, aims to offer guidance to investors on the climate impacts and risks facing publicly traded companies. This falls short of what experts say is necessary, but brands may still face pressure to disclose this kind of risk—especially if they operate in the European Union or California. "Just because the SEC doesn't require it doesn't mean the question of scope 3 goes away," said president and CEO of sustainability-focused business consultancy BSR Aron Cramer, advising brands to disclose scope 3 emissions in alignment with the emerging global consensus regardless of the SEC's ruling. "That's where your climate risk is. Therefore, disclosure is in your interest." Scope of impact While scope 1 refers to direct emissions from owned properties, and scope 2 refers to indirect emissions from purchased electricity, scope 3 emissions include indirect upstream emissions, generated within a company's supply chain, and downstream emissions, which include emissions from the transportation and use of sold products. Thanks to Regulatory Action, Scope 3 Emissions Are Getting More Attention. Here’s What Marketers Need to Know "The vast majority of a company's emissions are not going to be included by this rule," Cramer said of the rule excluding scope 3 emissions. "[That is] bad for companies, bad for investors, and bad in terms of climate action." Commenters opposing scope 3 emissions disclosures argued that it would be too expensive and laborious for companies, in part because it requires them to collect measurement data from partners up and down the supply chain. But because the rule focuses on scopes 1 and 2, it'll impact industries like cement, iron and steel—all of which generate the majority of their emissions through direct emissions and electricity consumption, but not after the product is made—more than it does others. For oil, gas, automotive and many consumer brands, most emissions fall within scope 3. For these industries, the ruling won't give a clear picture of their climate impact, making it hard for observers to compare one brand's impact against another. "It really pares back the regulation to focus on a narrow set of companies that are primarily heavy industry, like cement, that are consuming a lot of electricity," said Austin Whitman, CEO of The Change Climate Project. "[This rule] even lets oil and gas off the hook." Political challenges The SEC's rule creates something of a lowest common denominator when compared with climate-related disclosure requirements in the EU and California, or voluntary disclosure requirements laid out by the Task Force on Climate-Related Financial Disclosures or the International Sustainability Standards Board. But it also reflects the unique political environment within the U.S., where climate change has become a deeply divisive issue. The rule is likely to be challenged in the courts by its conservative opponents, Cramer noted, and dropping certain requirements is likely a strategic move on the part of the SEC's Democratic majority to protect it from potential legal challenges. "So much of these rule-making processes reflect the politics of climate change, generally," Whitman said. "We've gotten to a point where people are arguing that the EPA can't regulate greenhouse gas emissions and the SEC can't regulate financial risk. What the hell's the point of government?" SEC commissioners Hester Peirce and Mark Uyeda, both Republicans, voted against the rule, while Democratic commissioners Caroline Crenshaw and Jaime Lizárraga and SEC chair Gary Gensler voted in support, ultimately passing it on to the Federal Register.

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Kathryn Lundstrom

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Kathryn Lundstrom