The SEC Climate-Related Disclosures Rule: Another Supply Chain Challenge

Last month in “The Difficulty Of Measuring Scope 3 Emissions,” I highlighted how almost 70% of Costco’s shareholders voted “yes” on a proposal that calls on the company to set “short, medium, and long-term science-based greenhouse gas emissions reduction targets” to achieve net-zero emissions by 2050 — and how Costco’s board of directors wanted shareholders to vote “no” on the proposal for a variety of reasons, including the difficulty of measuring and controlling Scope 3 emissions.

Well, if a new rule proposed last week by the Securities and Exchange Commission is enacted, this will be a challenge many more companies and supply chain professionals will be wrestling with moving forward.

Here are some details from the SEC press release:

The proposed rule changes would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions…The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.”

As I shared in a recent Indago ResearchCast, in a survey we conducted with members of our Indago supply chain research community (who are all supply chain and logistic professionals from manufacturing, retail, and distribution companies), 55% of the respondents said that accurately calculating the carbon emissions of their imported goods would be Extremely or Very Difficult.

Part of the problem is the lack of globally adopted standards for measuring and reporting greenhouse gas emissions. There are some standards in development, such as ISO/DIS 14083 (“Greenhouse gases — Quantification and reporting of greenhouse gas emissions arising from transport chain operations”), but as history has proven many times, the journey of getting a business standard approved and accepted globally is often a long and painful one.

A bigger problem is that companies have many black holes in their supply chains. As I highlighted in a September 2020 post (“Supply Chain Mapping – Insights From Indago”), many companies have very poor visibility beyond their Tier 1 suppliers. “We know precisely where our local suppliers are located and the countries of the next upstream supplier,” said one Indago member. “Suppliers further upstream are rarely known with certainty…Unfortunately, most of the supplier locations in our ERP are office addresses and often not the location where product is actually manufactured or sourced.”

So, yeah, complying with the proposed SEC rule will be a huge challenge for many (if not all) companies. 

And as Richard Vanderford reports in the Wall Street Journal, this proposed rule could also “dramatically increase the exposure of these businesses to costly securities litigation.” Here is more from the article:

Lawyers that represent corporations and investors said that the proposal, released earlier this week, could be a potent source of securities fraud litigation, which targets companies over alleged lies or even half-truths told to the investing public.

The wide-ranging climate disclosures the SEC wants would up the number of avenues for a lawsuit. A wildfire in California destroys a facility, for example, and investors could claim they were misled about the company’s climate risk management. Or arguably investors could sue if the company miscalculated greenhouse-gas emissions.

Speaking of litigation, the SEC will likely face legal challenges in implementing this disclosure rule. For example, some may question whether this goes beyond the SEC’s authority and jurisdiction (i.e., whether this is something that Congress should address, not a regulatory agency). 

Of course, global companies, especially those with operations in Europe, already face similar disclosure and reporting requirements (see “US Follows EU’s Lead on ESG Reporting Standards”). So, regardless of what happens here in the U.S., many companies are already dealing with this challenge.

Maybe this climate-related disclosures rule will serve as a catalyst for companies to finally invest the time, money, and resources to properly map their supply chains. This will not only help them comply with this proposed rule, but also provide them with greater visibility to supply chain risks and help them create more resilient supply chains. This rule may also reduce or eliminate all the greenwashing that still goes on too. 

What do you think? Is this proposed SEC rule a good idea? Would you be able to comply with it today? What are the biggest challenges involved? Post a comment and share your perspective.