SEC backs off on requiring companies to report scope 3 emissions

March 7, 2024

Tracking the full impact of greenhouse gas emissions down the supply chains of publicly traded companies will not be required by the Securities and Exchange Commission, the agency decided Wednesday.

Scope 3 emissions are those generated by a company in the supply chain two steps away from the reporting company, though it would not be dealing directly with those companies. The initial rule proposed by the SEC would have required publicly traded companies to report their scope 3 emissions in public disclosures.

But the SEC pulled back on that rule even as it approved a broad reporting rule that still will require the vast majority of publicly traded companies to report scope 1 and scope 2 emissions. The rule was approved 3-2, with three Democrats voting yes and 2 Republicans voting no.

Scope 1 emissions are those coming directly from a facility or equipment of the reporting company, like a manufacturing plant or a truck fleet. A company required to report scope 2 emissions would need to report, for example, on the carbon footprint of a supplier of raw materials to a manufacturing operation.

But if the requirement went out to scope 3 emissions, the emissions profile of the suppliers of such things as electricity to the raw material provider would need to be reported to the SEC and by extension to the investment community for publicly traded companies.

Comments received in opposition to scope 3

The more than 800 pages detailing the SEC rule had an extensive recap of the thousands of comments received by the SEC on the proposed rule, which was first released in 2022.

“A significant number of commenters raised serious concerns about requiring Scope 3 emissions disclosures,” the SEC said. “Some asserted that the Commission lacks the authority to require disclosures of information that may come largely from non-public companies in registrants’ value chain; others questioned the value of Scope 3 emissions disclosures for investors, citing their concerns about the reliability of the metric; others focused on their view of the costs and burdens of gathering, validating, and reporting the information.”

Lindsay Azim, a director at Gartner Inc. (NYSE: IT), which does extensive consulting on supply chains, said the excising of the scope 3 emission requirement was expected. But she emphasized that the passage of the broader SEC rule is a big step.

“Climate risk is financial risk,” Azim said, and the rule drives that point home. But she added that “all the risk is in scope 3. So there is a huge blind spot there.”

For a manufacturing company, knowing the level of emissions in scope 1 and scope 2 is important, “but we know that 90% of the climate risk is in their value chain.” Information that omits that is “not telling the whole story,” she added.

Azim conceded that the burden of producing scope 3 emissions data is “huge.” That is why “no one is surprised” by the SEC action.

But U.S. companies are not entirely out of the woods regarding scope 3 emissions disclosure.

California and Europe are still out there

Most prominently, California has enacted legislation that will require scope 3 emissions reporting from companies doing business in the Golden State.

The law firm of Dentons, in a blog post from October, said estimates were that 8,000 companies would fall under the California scope 3 emissions requirement. Specific requirements from the California Air Resources Board have not been released yet, but Dentons said reporting requirements would be expected to begin in 2027.

There also are reporting requirements in Europe under the Corporate Sustainability Reporting Directive (CSRD). According to consulting firm Oliver Wyman, that requirement could pull in close to 12,000 companies worldwide..

In addition, some companies have set emissions targets and standards that will require carbon footprint information from parties it deals with regardless of the SEC’s action.

In an interview on FreightWaves’ Drilling Deep podcast last year, Laura Rainier, the senior research director in the talent and sustainability team at Gartner and a colleague of Azim, talked about the private sector trend toward requiring emissions reporting beyond anything a government might require.

“I think we’re seeing a lot of momentum around organizations reporting on their greenhouse gas emissions, because their customers are asking them for this type of data,” Rainier said. “So even if it’s not part of your values, it’s certainly starting to become required as a kind of a player in a major value chain.”

Mindy Lubber, the president and CEO of Boston-based sustainability nonprofit Ceres, also emphasized that the SEC decision is not the death knell for scope 3 emissions disclosure.

“For most companies and financial institutions, indirect emissions throughout a company’s value chain represent the largest source of a company’s transition risk,” Lubber said in a statement on the Ceres website. “While we are disappointed the rule does not include key provisions from their 2022 proposal, including the mandate of the disclosure of Scope 3 emissions, investor demand for the disclosure of Scope 3 emissions continues to grow and many companies will be required to disclose this data in other jurisdictions.”

For publicly traded companies in the supply chain, the rule adopted by the SEC still has plenty of specifics beyond simply reporting scope 1 and scope 2 emissions. Some of the other required disclosures will be:

“Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.”

Information on what a company is doing to “mitigate or adapt to a material climate-related risk.”

A wide range of information that all ties back to disclosing how the company is at risk for climate-related occurrences.

Financial estimates on what weather-related incidents might do to the reporting company.