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SEC’s climate rule heats up debate on supply chain emissions

The worry is that suppliers' emissions data won't be verifiable

Sen. Brian Schatz of Hawaii is one of eight Senate Democrats urging the SEC to include a threshold for Scope 3 emissions reporting.
Sen. Brian Schatz of Hawaii is one of eight Senate Democrats urging the SEC to include a threshold for Scope 3 emissions reporting. (Bill Clark/CQ Roll Call file photo)

The business world is divided over whether the Securities and Exchange Commission should require emissions data from corporations’ suppliers and customers when the agency finalizes a rule on climate-related financial risk disclosure.

While the SEC sees broad support for its proposed rule to mandate standardized information on companies’ direct emissions and other material risks from climate change, agency staff members reviewing comments face a difficult task in striking a balance in the coming months on emissions from suppliers and other third parties.

A wide range of billion-dollar asset managers, investor coalitions and boutique firms focused on environmental, social and governance investing told the SEC they support the agency’s provisions to include Scope 3 emissions, meaning indirect releases from supply chains. But several trade groups say there is strong opposition.

“The SEC has also taken the correct approach by incorporating many of the elements set forth by the Task Force on Climate-Related Financial Disclosures and by requiring disclosure of [greenhouse gas] emissions, including disclosure (for many companies) of Scope 3 emissions and third-party assurance of Scopes 1 and 2 emissions,” Ceres, a nonprofit organization that works with ESG investors and companies to address climate risk and other sustainability issues in capital markets, said Friday in a letter to the SEC.

Other supporters include BNP Paribas, the California Public Employees’ Retirement System, Sumitomo Mitsui Trust Asset Management, Seventh Generation Interfaith Inc. and Christian Brothers Investment Services Inc.

“As a starting point, the basis for the rulemaking initiative — that climate change poses a significant financial risk — is surely clear and unmistakable,” Ceres said in the letter. “It is likewise reasonable for the Commission to conclude that this risk is, or can be, material to investors. This is not a matter of conjecture; investors have repeatedly and emphatically expressed this view.”

If finalized, the rule would require public companies to report to the SEC on Scope 1 and Scope 2 greenhouse gas emissions, which address direct and indirect emissions from purchased electricity and other forms of energy.

But they would have to report Scope 3 emissions only if they are material or if companies have set reduction goals that include Scope 3. The proposal contains a broad safe harbor for liability for Scope 3 emissions disclosure and exemption for smaller issuers on Scope 3 emissions.

Scope 3 challenge

Scope 3 emissions have been a particularly controversial area in the proposal. During the agency’s information-gathering period, companies and industry coalitions voiced concern about lawsuits over emissions outside of companies’ direct control. Some legal experts have said the proposal’s provisions surrounding Scope 3 emissions would indirectly create disclosure requirements for third-party, nonpublic companies that work with major public corporations.

“For many issuers, it would be extremely difficult to access downstream information on customers’ use of their products,” the National Association of Manufacturers, which represents 14,000 member companies, wrote in a letter to the SEC on June 6. “For others, upstream emissions attributable to commodity production would present the biggest challenge. The unifying theme is that Scope 3 emissions are outside of a company’s control.”

That debate has trickled over to Congress. Eight Democratic senators, led by Brian Schatz of Hawaii, Sheldon Whitehouse of Rhode Island and Elizabeth Warren of Massachusetts, called on the SEC to include a quantitative threshold for Scope 3 reporting to prevent underreporting in sectors that have most of their emissions coming from supply chains.

But 32 Republican senators, including John Hoeven of North Dakota, Tim Scott of South Carolina and Michael D. Crapo of Idaho, told the SEC that such requirements would be overly burdensome for farmers and agricultural producers.

At press time, public comments from some companies that would be affected by the proposal were available. Salesforce, Dell Technologies and Etsy were among the top firms that filed letters with the SEC, largely in support of the proposal. But dozens of major corporations met with SEC Chairman Gary Gensler and Commissioners Caroline Crenshaw, Hester Peirce and Allison Herren Lee, as well as agency staff, in the weeks after the agency announced its proposed rule in March.

According to memos published by the SEC, the agency held more than 50 meetings after it released the proposed rule. The SEC met with General Motors CEO Mary Barra twice to discuss the climate risk disclosure proposal, including Scope 3 emissions and the safe harbor provision.

SEC staff also focused on companies’ concern with Scope 3 emissions with chief accounting officers and controllers from dozens of corporations, including Google parent Alphabet, Bank of America, Mars, Verizon Communications and Wells Fargo in a May 17 meeting. The agency held talks with representatives from Dow,, The Goldman Sachs Group and JPMorgan Chase & Co. throughout the comment period.

Other corporations may have relied on trade associations to advocate on their behalf.

“A large majority of our members believe that the Commission should not require companies to report Scope 3 emissions at this time, because of significant data gaps and the absence of agreed-upon methodologies to measure Scope 3 emissions,” the Investment Company Institute, an association for regulated investment funds representing $29.7 trillion in U.S. assets under management, wrote in a June 16 letter to the SEC.

“These deficiencies seriously undermine the ability of most companies to report consistent, comparable, and verifiably reliable data,” the ICI wrote. “Any company calculating Scope 3 emissions will have to make a number of assumptions that can vary greatly in magnitude and will use different methodologies.”

The ICI and several other groups, including the Committee on Capital Markets Regulation, a nonpartisan research group, suggested that the SEC should put off Scope 3 requirements while the agency works with the private sector to develop better calculations for indirect emissions from suppliers and other third parties.

But several ESG investors are pressuring the SEC to expand the Scope 3 reporting requirement beyond large issuers, arguing that the discretion around Scope 3 emissions being material to a firm may be an easy way out for companies to ignore impacts from their supply chains.

“Many companies fail to fully understand or assess the full impact of their Scope 3 emissions; leaving the determination of materiality up to companies is likely to lead to underreporting of these risks,” said Mercy Investment Services Inc., the asset management arm for the Sisters of Mercy of the Americas.

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