Climate-related reporting for large public companies just got murkier. At least, that’s one takeaway from the US Securities and Exchange Commission’s long-awaited climate-related reporting rule, issued in March.
Significantly, the final rule excludes Scope 3 emissions, which are emissions from indirect sources like supply chains and consumers. These account for 75% of companies’ greenhouse gas emissions on average, according to the World Resources Institute. And some jurisdictions, such as the EU and California, will soon require such reporting.
Scope 3 had been included in earlier drafts of the US bill but was scrapped amid pressure from business lobbying groups and others. The final rule requires Scope 1 and Scope 2 emissions reporting, which cover activities more directly under a company’s control, like smokestacks, company cars and electricity usage.
Environmental groups and business associations blasted the final rule. The Sierra Club, which filed suit against the agency, said the “watered down” rule “falls short,” while the U.S. Chamber of Commerce, also suing, said the agency went too far, overturning 50 years of corporate governance precedents.
Still, some wonder if Scope 3 disclosures aren’t inherently problematic, given their lack of direct control. Kristina Wyatt, former SEC senior counsel for climate and ESG, and now chief sustainability officer at Persefoni, says there is “a misperception” that Scope 3 emissions reporting “would require companies to obtain emissions data from all their suppliers and others in their value chains. This is not the case.”
Global investors are likely going to expect Scope 3 reporting in the future, given that they account for the majority of most companies’ overall emissions. Moreover, “The SEC is not the only regulatory game in town,” adds Wyatt. “Many companies are, or will be, subject to reporting requirements that include Scope 3 in jurisdictions including California, Europe and the many jurisdictions that are adopting rules that incorporate the ISSB standards.” Suzanne Ashley, founder of Materiality Strategies and former special adviser and a senior SEC counsel, says firms shouldn’t wait for the resolution of legal challenges to the SEC rule. “Investors and other stakeholders will expect companies to have a coherent narrative around the totality of their climate-related disclosures.”
