SEC Excludes Scope 3 Emissions from Climate Disclosure Rule

Last week, The Securities and Exchange Commission (SEC) announced the adoption of rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” The press release outlines all of the disclosures required, including Scope 1 and Scope 2 greenhouse-gas emissions. SEC Chair Gary Gensler commented:

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

The press release also highlights that “the Commission considered more than 24,000 comment letters, including more than 4,500 unique letters, submitted in response to the rules’ proposing release issued in March 2022.”

It’s safe to assume that many (if not most) of these letters were against including Scope 3 emissions in the rules, which is why that requirement was excluded from the disclosure requirements.

As I highlighted in a February 2022 post, “The Difficulty Of Measuring Scope 3 Emissions,” members of our Indago supply chain research community — who are all supply chain and logistics executives from manufacturing, retail, and distribution companies — said that accurately calculating and disclosing the greenhouse-gas emissions of their supply chain operations would be “Extremely” or “Very” difficult. As one Indago executive commented at the time:

“In the white towers of government bodies, this makes complete sense and is viewed as a rational step by lawmakers who live there. In the real world, where suppliers are constantly changing and carbon emissions data is scant, this makes absolutely no sense and is impracticable in every way.”

Yet, as I highlighted this past January in “Another Reason To Expand Definition Of Supply Chain Visibility,” the legislature in California passed Senate Bill 253 in September 2023 that will require companies with over $1 billion in revenues that do business in the state to disclose all greenhouse-gas emissions associated with their operations, including Scope 3 emissions. Disclosure of Scope 1 and Scope 2 emissions will begin in 2026, and Scope 3 emissions will begin in 2027.

In an Indago survey we conducted in November 2023 about this California law, “Obtaining emissions data from external partners (Scope 3)” topped the list of challenges in calculating and reporting supply chain greenhouse-gas emissions, with 77% of the respondents selecting it. 

In short, the SEC decision to exclude Scope 3 emissions from its disclosure rules is a moot point if you’re a large company that does business in California. 

Also, as expected, the SEC is already facing legal action against these rules. As Mark Segal reported in ESG Today, “a coalition of ten Republican states announced the launch of a lawsuit in the U.S. federal appeals court, aimed at blocking the implementation of the U.S. Securities and Exchange Commission’s (SEC) new climate-related disclosure rules.” The U.S. Chamber of Commerce also issued the following statement:

“For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth, and legality of the SEC’s climate disclosure efforts. We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact. While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The Chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital market system.”

Meanwhile, across the pond, “the European Union is coming under pressure to pare back its sweeping plan to cut greenhouse gas emissions,” according to a February 2024 article in the Wall Street Journal. Here’s an excerpt:

The EU has rolled out a raft of new regulations, taxes and investment programs in recent years that propelled the bloc to the forefront of the global fight to combat climate change. As European governments implement the measures, however, they are colliding with farmers, business groups and politicians who say the climate agenda is out of step with more urgent problems on the continent.

The bottom line is that there’s no firm ground yet for companies to stand on when it comes to calculating, disclosing, and reporting greenhouse-gas emissions. Not only is there no true standardization yet across countries, there’s no true standardization even within the United States. And things will likely continue to be in flux for some time, depending on how the political winds blow and who occupies those white towers of government bodies. 

At a minimum, companies must stay informed of what is happening on the legal and regulatory fronts with greenhouse-gas emissions. Companies should also put together a strategy on how they will measure Scope 1, 2, and 3 emissions. What data do they have today? How is that data measured? Where is it stored? Which data are they missing? How can they get this missing data? Who needs to be involved? Do they need to make additional investments in technology and other resources? Those are just some of the many questions companies should be discussing today, not only internally but with their trading partners too.