Investors support the U.S. Securities and Exchange Commission’s (SEC) proposal for Scope 3 corporate value chain emissions reporting, saying it gives them important information to assess business risk, according to comments from SEC Chairman Gary Gensler in a forum discussion in the U.S. Chamber of Commerce.
The comments indicate that reporting of Scope 3 emissions will likely remain part of the final rule when it is ultimately released, although the final wording of the reporting requirements for supply chain emissions remains unclear, with companies and smaller businesses pushing back on issues such as costs and compliance with the new rules were disrupted, and Gensler himself expressed concerns about staying within the SEC’s mandate.
The SEC published its proposed climate disclosure rules in March 2022, which will require U.S. companies to provide information about the climate risks facing their businesses, and plans to address these risks, along with metrics that measure the operational climate footprint of the companies and in some cases describe their emissions in detail. that radiate throughout their value chains.
In his comments, Gensler emphasized that the primary motivation behind the SEC’s rulemaking was to fulfill its mission to “assist investors in making investment decisions,” with climate reporting rules aimed at providing investors with material information in an environment in which companies are already making more and more decisions. climate-related revelations.
“In 2021, of the companies included in the Russell 1000, so roughly the top thousand companies, 81% are already reporting some climate risk disclosure and 57% are reporting on Scope 1 and Scope 2 – probably grown in 2022, much less a so-called Scope 3 Now there is no consistency, there is not necessarily comparability and there is a role for the SEC to try to bring some consistency and comparability. And that drives efficiency in the capital markets, because investors then get something consistent.”
Gensler said the SEC’s proposed climate rule has received significant feedback, including 16,000 comments from companies, investors and other stakeholders, with the rules’ emissions reporting requirements being a key area of focus, with “a lot of commentary on the Scope 3 reports.” While investors noted that investors were broadly in favor of Scope 1 and 2 emissions reporting and were divided on Scope 3, issuers had “many questions, doubts and concerns” about Scope 3 reporting requirements.
To address issuer concerns, Gensler noted the SEC’s phased approach to Scope 3 reporting requirements, conceding that “Scope 3 is not very well developed yet,” and only requires disclosure if the company determines it is material or has made a public commitment regarding its Scope 3 emissions.
In addition to the issuers’ concerns, Gensler said the SEC received comments from smaller companies and affected agricultural entities that they would be required to provide emissions reporting to their larger company customers, despite not being under the SEC’s purview.
“We’ve had a lot of responses from the agricultural community, rural America, saying, ‘Look, we’re a farmer or rancher, you know we’re not a government company, we shouldn’t get involved in this.’ ‘ And I agree with that.”
The SEC chairman added that these are the issues the commission is currently working on for its final rule:
“That’s why staff are looking at how we can ensure that we don’t do indirectly what we can’t do directly – we don’t regulate non-public companies, no, and we’ve been very clear about that.”
However, despite the Scope 3 challenges, Gensler was clear that the issue remained important for investors to manage risk:
“What investors have told us in the comments they’ve sent to us is that understanding a company’s supply chain emissions – and this is from investors – helps understand what transition risk becomes mentioned, you know what could happen. be the future for that company. And there may be transition risk because customers may buy different products because of a supply chain’s emissions, or regulations may change, or even employees may want to work for one company rather than another.
“The only mandate we have at the SEC is because of that – is it material?”
However, whatever final form the SEC’s rule takes, many U.S. publicly traded companies will likely be required to provide Scope 3 information under other regulatory reporting regimes. For example, California Governor Gavin Newsom recently signed a bill that effectively requires major U.S. companies doing business in the state to disclose their full value chain emissions. Similarly, the EU Directive on Corporate Sustainability Reporting (CSRD) extends reporting requirements to non-European companies generating more than €150 million in the EU, and also includes Scope 3 reporting. Gensler noted that the requirements imposed by these laws will impact the “economic basis” of the costs of the SEC’s climate reporting rule, with many companies already required to report on these factors.
Gensler also did not indicate a timeline for the completion of the climate-related reporting rule. Gensler said, “I don’t know when it will appear in the Federal Register,” and jokingly added, “And I’m not announcing that here.”