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Scope 3 and the SEC: What happens now?

The latest SEC ruling on climate disclosures recently took place. What happened – and what does it mean for Scope 3?

On March 6th 2024, the United States Securities and Exchange Commission (SEC) set in place new rules regarding climate disclosures, requiring many companies to disclose greenhouse gas emissions and climate change-related risk, including in their annual reports. Although the ruling was watered down considerably from the original proposal, it still met with considerable blowback from opponents.

Let’s take a look at what’s happened previously – and what happens now.

What were the SEC proposing?

Previously, companies only disclosed their climate impact information on a voluntary basis. There has been no standardised way to report climate data, and many companies used different metrics or chose not to report at all.

Although the SEC has been encouraging companies to disclose their climate-related risks since 2010, the voluntary nature of those disclosures has made it much easier for them to water down their data or simply avoid publicising it altogether. Accordingly, in recent years the SEC and its chair, Gary Gensler, have been taking bigger steps towards enshrining disclosure rules in an effort to drive accountability and transparency across the market.

In its original form, the proposed regulation would have required US-listed companies to disclose a range of climate-related risks and greenhouse gas emissions, including Scope 1 and 2 emissions. The proposal also required organizations to disclose the greenhouse gasses generated by their suppliers and partners, known as Scope 3 emissions (if the emissions are material or included in emission targets the company has set.)

What‘s the latest update?

In an attempt to pre-emptively placate likely opposition, the updated rules this March contained some striking omissions. It was, as Fortune noted, “as notable for what it contains as for what it leaves out.” Scope 3 emissions, which are created indirectly along the value chain and can make up a significant proportion of a company’s carbon footprint, were omitted from the final version. So was a direct emissions disclosure requirement for all public corporations.

Nonetheless, despite the dilution, the adoption of the rules marks something of a watershed moment. As Gensler stated before the vote: “Our vote today is on rules, not just guidance like we had in 2010 but on actual rules and ones that require disclosures. Bringing them into such filings I think will help make them more reliable.”

He continued: “I’m pleased to support this adoption because it benefits investors and issuers alike. It would provide investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements.”

SEC documents show that the disclosure will require companies to share how climate conditions affect their business strategy, operations, and financial condition.

Their reported information must include direct emissions like manufacturing and indirect emissions like energy use, but companies will not be required to report emissions from supply chains and product consumers (which we were part of the original proposal, but not adopted).

As expected, the rule drew what might be charitably described as a mixed response. 10 Republican-led US states – as well as the top US business group – vowed to sue the SEC. Meanwhile, several environmental groups applauded the rule but said they had hoped for stricter requirements.

Although the disclosure is not an environmental protection law, it will certainly serve to increase transparency, with Bryan McGannon, managing director of the non-profit sustainable investment forum US SIF, telling Business Insider that it was “a really good first step” in that regard.

“I think that it’s going to be very valuable for investors to use this information to get that better understanding — and understand if the company is taking it seriously,” McGannon continued. “Are they identifying all the risks?”

He noted that there is a lot of climate reporting that is not being done right now, and the disclosures will allow investors to better digest a company’s climate data and make good investment decisions.

What do companies need to do now?

Companies will not be required to report emissions from supply chains and product consumers, as per the SEC. The supply chain disclosures – Scope 3 emissions – were in the original rule proposal, but were not adopted. As Business Insider noted: “For companies that sell many products or finance infrastructure — like food companies, oil and gas majors, and big banks — these emissions are often the biggest chunk of their overall carbon footprint.”

So does that mean Scope 3 reporting is no longer important? Not quite, say business leaders. Alongside investor and stakeholder pressure on reporting, the latest SEC ruling means that “companies are now facing a wave of global requirements,” according to KPMG’s US ESG Leader Rob Fisher.

He continues: “Amidst these disclosure requirements, the organizations that view new reporting requirements as an integral part of their broader strategy will find themselves in a better position to realize the full value sustainability initiatives can bring to their business.”

“Scope 3 may be out of the SEC’s climate rule but it’s very much in scope for US multinationals and likely many private companies. The SEC’s rule followed actions of the EU, California and the ISSB, all of which require Scope 3 reporting. Regulatory relief in one jurisdiction does not alter the burden imposed in others.”

Sustain.Life’s Chief Sustainability Officer Alyssa Rade concurred, calling the omission of Scope 3 reporting requirements by the SEC an “irrelevant caveat.”

“Companies shouldn’t be lulled into a false sense of security. Existing regulations in California and the EU and resulting pressure from investors and consumers make the SEC’s decision to exclude Scope 3 from their emissions mandate an irrelevant caveat for most global corporations. We’re already witnessing a mad scramble for disclosure data. Companies of all sizes — irrespective of their geographic location — need to understand that climate disclosures will be the norm within the next decade.”

The common consensus seems to be that, regardless of Scope 3 featuring as part of the SEC’s latest ruling or not, organizations need to get their houses in order as a priority. And the benefits extend far beyond just “reporting compliance” as Makersite’s CEO Neil D’Souza says:

“Transparency around carbon emissions is a complex but necessary undertaking, yet many organizations are waiting for mandates before they get their house in order. It’s most often because they have not yet unlocked any business value beyond ‘reporting compliance.’ Creating better, more differentiated products that are priced better, have better win rates, improve brand performance, mitigate supply risks and reduce costs from efficiency measures are all much more powerful value propositions that are unlocked through the process. It just takes time and effort to get there and technology like AI can help solve many of the challenges in tracking, reporting, assurance and dissemination.”

More rigorous emissions regulations will continue to appear. It is only a question of time until Scope 3 reporting, for example, will be mandatory for companies. Countries worldwide have committed to emission targets and those targets will, sooner or later, reach industry level. Companies that take voluntary action now will thrive, but companies who don’t will be left behind. So how can they prepare? There are four key steps to take:

  • Conduct a data gap assessment: Check what data is available in-house and if the data is easily accessible for stakeholders. At the end of the assessment, you should be able to put together an inventory of climate-related data you already have in comparison to the data the rule requires – and then act on the differences.
  • Re-evaluate your approach to data collection: Is your sustainability reporting scalable and cost effective? Have you committed to Net Zero goals and can they be backed up with trustworthy data? How long will it take you to have full Scope 3 reporting across all products?
  • Support your key stakeholders: Key champions for reduction initiatives in an organization will most likely sit across procurement, product management and product design teams. To be able to move forward and hit emissions targets, you need ensure that these stakeholders have everything they need to work efficiently.
  • Don’t do it alone: Scope 3 reporting is different: The vast majority of data you need does not sit within your company. Tools are invaluable for saving time, increasing credibility for auditors and, most importantly, critical in order to achieve meaningful progress with the data you are collecting. The right tools can help you to report on existing and future products at scale. The reporting obligations of the future are a complex issue that will take companies a long time to solve. Starting now will put your company ahead of others and help you prepare for prospective challenges.

If you’d like more information on how to stay up to speed with the latest regulatory developments, speak to our sustainability experts today.

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