Republican lawmakers are zeroing in on disclosure requirements around so-called Scope 3 greenhouse gas (GHG) emissions in the SEC’s proposed climate risk rules.
Since the SEC issued its proposal in March in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, Republican critics – in comment letters and public statements – have leaned heavily on the cost and complexity of calculating and disclosing Scope 3 emissions as the centerpiece of their argument in favor of scrapping the proposal.
Release No. 33-11042 would require public companies to make detailed disclosures on both GHG emissions and climate risk. Among other requirements, registrants would need to disclose separately Scope 1 direct emissions and Scope 2 emissions, those that stem from energy consumed by the company. A registrant would need to disclose its Scope 3 emissions – all those indirect emissions that fall outside of Scope 2 – if that information is deemed material, or if it has set emissions goals that include Scope 3 emissions.
Scope 3 emissions often make up the majority of an entity’s GHG emissions, capturing both downstream and upstream emissions associated with a company’s value chain that are generated by sources neither owned or controlled by the company, such as those created by the transportation of goods bought from suppliers, or from employees’ commutes. Proponents of robust Scope 3 disclosures argue that omitting them would allow companies to vastly under-report their contribution to climate change and associated risk.
“This is not a climate rule, it’s a financial disclosure rule,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, in an interview. “And if you are an investor saying ‘I want to understand more about the financial risk,’ if you don’t have Scope 3, you won’t see the whole picture.”
Republicans in both the House and Senate in recent months have launched repeated volleys against the proposed rules in the form of bills, resolutions, and amendments to larger measures that would prevent the SEC from finalizing the proposal in Release No. 33-11042, which with Democrats in control of Congress and the White house remain purely symbolic. Those include a July bill from Rep. French Hill of Arkansas; a June Congressional Review Act (CRA) resolution from Rep. Bill Huizenga of Michigan; an April resolution from Rep. Dave Joyce of Ohio; an unsuccessful attempt in July to amend the fiscal 2023 defense authorization bill to restrict the rules; and, most recently, a failed amendment by Rep. Pat Toomey of Pennsylvania, the ranking Republican on the Senate Banking Committee, to the Inflation Reduction Act package that President Joe Biden signed into law on Aug. 16, 2022. Toomey’s amendment would have committed the bill to the Senate Banking Committee with changes that “would reform the funding structure” of the SEC to “prevent funds from being used to finalize any rule that is identical or substantially similar to, or a logical outgrowth from” the SEC proposal. Those efforts are likely to intensify if Republicans take a majority in the House and/or Senate following the November mid-term elections, which would likely run parallel to an industry legal challenge against the rules that is widely seen as inevitable.
Those critics have relied on the Scope 3 component as a central element of the campaign against the proposal. In an April 5 comment letter, Toomey and other Senate republicans warned that the SEC hasn’t taken into account “the substantial compliance costs that will be imposed on suppliers and vendors, many of which are small non-public companies, when public companies demand that they provide information on Scope 3 GHG emissions.”
“Small non-public companies will be harmed by facing higher compliance costs as public companies request non-material information on Scope 3 GHG emissions, or risk the loss of business if they fail to provide such information,” they wrote.
In a July 20 letter, a group of House Republicans that included Rep. Blaine Luetkemeyer of Missouri, the ranking member of the House Small Business Committee, argued the Scope 3 requirements “threaten to extend GHG disclosures well beyond the SEC registrants to nearly every privately owned entity in the country, including countless small firms who often do not have the necessary resources to comply with the significant demands of scope 1 and 2 disclosures.”
“For example, any manufacturer in the country who supplies parts to a publicly traded company would be required to supply GHG emission disclosures as part of the Scope 3 emission requirements of the publicly traded company,” they wrote. “In addition, any farm that supplies feed to a publicly traded company would similarly be required to supply GHG emissions information to comply with the scope 3 requirements as a part of the ‘value chain’ of a publicly traded company.”
And at a July hearing by the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, Republicans pressed SEC Enforcement Director Gurbir Grewal on how the commission planned to enforce the Scope 3 disclosure requirements. (See Republicans Grill SEC Enforcement Director Grewal over Upcoming ESG Rules in the July 20, 2022, edition of Accounting & Compliance Alert.)
Those criticisms are offset by a wide array of comments from investors, Democratic lawmakers, and other climate risk disclosure supporters. Ceres, in its comment letter, suggested some changes to strengthen the scope 3 disclosures and other aspects of the proposal, but praised the SEC and its staff for drafting “a well-constructed set of rules that protects investors and meets investor demand for better disclosure about climate-change risks.”
“We think that Scope 3 is a significant risk that investors are asking for,” Rothstein said. “We’ve worked with literally dozens of investors, close to 100, who have submitted comments, and overwhelmingly they want Scope 3 information to protect against risk.”
While acknowledging Scope 3 emissions are complicated – and that Scope 1 and 2 are easier to measure – he said there are “hundreds of companies, really thousands, around the world that are already measuring Scope 3.”
“They are not reporting to the SEC, they may be sharing it with their investors, they may be putting it on their website,” he said. “There is a lot of information out there.”
The SEC is proposing a phase-in period for all registrants, along with an additional one specifically for the Scope 3 disclosures, as well as a safe harbor from liability for Scope 3 disclosures made in good faith.
This article originally appeared in the August 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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