Companies Worried About Cost of SEC’s Climate Disclosure Rules

The U.S. Securities and Exchange Commission (SEC) is forging ahead with rule changes for mandatory climate-related disclosures that are more stringent and potentially costly than some businesses had hoped.

Under a proposed rule the SEC published last week, all publicly traded companies would be required to disclose data about climate-related risks that have a “material impact on their business,” including greenhouse gas emissions and energy consumption, which the SEC classifies as Scope 1 and Scope 2 emissions, respectively. 

A particularly thorny part of the 510-page proposal would require some companies to report Scope 3 emissions, which a business generates indirectly through its dealings with third parties, such as customers and suppliers. These types of emissions can be difficult—and particularly expensive—for companies to measure. 

“The SEC’s climate disclosure proposal is the most extensive, comprehensive, and complicated disclosure initiative in decades,” Wilmer Cutler Pickering Hale and Dorr partner Meredith Cross, a former SEC official, said in a statement. Cross noted that the “sheer quantity of information that would be required in Form 10-K and the third-party attestation requirements would dramatically increase climate-related disclosure obligations and the related costs.”

Elizabeth Saunders of Clermont Partners, a women-owned environmental, social, and governance (ESG) strategy and communications business based in Chicago, said she and her co-partner at the firm had fielded about a dozen calls and emails from general counsel and CFOs. Virtually all of them were concerned about the costs of complying with the proposed rule changes, especially Scope 3.  

Most companies will first have to calculate their Scope 1 and 2 emissions before beginning to determine whether they’re required to report Scope 3 emissions, which Saunders said could involve a “very costly analysis.” Then, if they’re not exempt, the companies will likely have to wrangle a large amount of unwieldy data from third parties to disclose to the SEC. 

“Scope 3 could be massive if you have traveling consultants and a sales force, for instance,” Saunders said.

The proposal exempts smaller reporting companies from the Scope 3 emissions disclosure rule, which also includes a safe harbor provision for liability from Scope 3 emissions disclosure. And Scope 3 would be phased in following Scope 1 and 2 disclosure requirements. 

The Scope 3 requirement applies to companies that have voluntarily set emissions reduction targets that include Scope 3 emissions, or when the emissions in question are deemed to be “material.” Determining whether Scope 3 emissions are, in fact, material could be difficult for some companies.

SEC Commissioner Hester Peirce asserted in a statement opposing the proposed rules change that the “materiality limitation is not especially helpful because the Commission suggests that such emissions generally are material and admonishes companies that materiality doubts should ‘be resolved in favor of those the statute is designed to protect,’ namely investors.”

In its proposal, the SEC floats the idea of defining material Scope 3 emissions as being 40 percent or more of a company’s total greenhouse gas emissions. But Peirce argued that the SEC muddied the waters by also stating that the emissions have to be reported when they represent a “significant risk,” are “subject to significant regulatory focus, or ‘if there is a substantial likelihood that a reasonable [investor] would consider it important.’ In sum, the Commission seems to presume materiality for Scope 3 emissions.”

The U.S. Chamber of Commerce, National Retail Federation, and other powerful stakeholders will likely push back against the proposed rule changes, which they view as burdensome and an overreach, through legal actions. But Saunders doesn’t expect much litigation until the end of the year, after the SEC closes the 60-day window on public comments on the proposal. 

“Now, we’re telling clients that they’re best served to come back [to the SEC] with specific data and facts around the areas that are most onerous, versus being general,” she said. “So I think we’re in the third inning of this.”

From: Corporate Counsel