The SEC’s Proposed Climate Rules Highlight the Scope 3 Emissions Debate

A new 510-page rulebook from The Securities and Exchange Commission would force the hands of companies to reveal metrics surrounding their climate impact to potential investors beginning as early as next year.

Specifically, the proposed climate disclosure rules would include details on emissions goals and climate strategies. It would also require publicly listed companies to disclose details about energy transitions and extreme weather events and how they would potentially impact their businesses.

The announcement was applauded as a step toward mitigating climate change, but controversy surrounds the SEC’s approach to Scope 3 emissions.

The proposal says all public companies regardless of their size would need to report on their Scope 1 and 2 emissions, including all greenhouse gases as well as carbon output from electricity.

Scope 3 emissions reporting

Scope 3 emissions relate to up and downstream carbon outputs, including suppliers and manufacturers as well as customers. But a recent study found Scope 3 emissions are largely left unaccounted for by large companies including Amazon.

For a number of companies, particularly in the manufacturing arena, Scope 3 emissions are the bulk of their carbon footprint.

“Scope 3 disclosures are often vitally important to understanding a company’s overall greenhouse gas emissions and therefore overall climate-related risks,” SEC Commissioner Allison Herren Lee, one of the leading proponents of this effort, said in a statement.

One area the SEC excluded from the Scope 3 criteria is the automotive industry, where the bulk of emissions come from customer use. The proposal is also receiving pushback on Scope 3 emissions, particularly from Republicans and some special interest groups.

They say like the automotive industry, companies are not able to mitigate the carbon from suppliers or customers, calling the task of reporting on Scope 3, “burdensome.”

‘A full view’

“I think that the SEC was incredibly sympathetic to the concerns that were raised. This is very measured, balanced and extremely reasonable,” said Isabel Munilla, who directs U.S. financial regulation at Ceres, an environmental nonprofit.

“The most important thing we can say about it is a majority of investors have asked for this information and asked for it on the record at the SEC,” said Munilla at Ceres. “It really provides a full view into a companies’ [sic] handling of climate risk and its understanding of its exposure, including within its supply chain.”

The proposal is further complicated by exceptions for smaller companies that would not be required to disclose their indirect emissions for at least another year after the larger companies. These smaller companies would also be provided with “safe harbor” from liability, E&E News reports.

But proponents of the move say they’re pushing forward, specifically on Scope 3 emissions, which Alex Martin, a senior policy analyst at Americans for Financial Reform, said is “one of the most important areas.”

“We have an example of the SEC using a materiality standard where issuers decide,” Martin said.

“And what we got out of that was totally incomplete disclosures, totally incomparable, not clear which sectors even were the most exposed, and it wasn’t always the sectors that were the most exposed that wound up talking about climate risks,” he added.

“We’re going to be making the strongest case that we can for the [largest] number of issues to be reporting on Scope 3. Because, honestly, investors say that’s a really big part of their assessment on financial risk, that’s a really big part of what they were asking for, and it’s the SEC’s job to get this information.”

Lead image Raychel Sanner on Unsplash