SEC Climate Change Disclosure Regulations: No Scope 3 Requirements

The U.S. Securities and Exchange Commission (SEC), as expected, has dropped a requirement for U.S.-listed companies to disclose so-called Scope 3 emissions.

Walking back the Scope 3 requirement represents a win for those in the corporate world that lobbied against the changes and would deviate from European Union rules such as CSDR -- which would make Scope 3 disclosures mandatory for large companies starting in 2024, Reuters noted.

Even without Scope 3 requirements, companies need to stay on track with current carbon emission plans, according to Nithya Das, chief legal officer at Diligent. Ahead of the SEC decision, Das said: “The SEC potentially not including a Scope 3 reporting requirement should be a decision that means little for companies. Even if the SEC only requires Scopes 1 and 2, this requirement still makes it clear that emissions are now officially correlated with risk in the US. The writing is on the wall, and business plans around emissions reporting should not change. 

Added Workiva VP Steve Soter, also ahead of the SEC decision: “Regardless of the inclusion of Scope 3 emissions, SEC climate rules will still be a tough mountain to climb. Even if the SEC removes Scope 3 from its climate disclosures, many companies will still need to report on it if they’re doing business in California, under the state’s recent ruling, if they do business in Europe under the CSRD, or if other stakeholders are asking for it. Greenhouse gas emissions reporting, especially when combined with financial reporting and subject to assurance, will require integrated processes, teams, and importantly, integrated technology. Companies need to prepare now for climate disclosure regulations and by getting ahead they’ll save themselves future headaches.”

Soter also is the former director of SEC reporting for Overstock.com.

SEC Climate Regulations: Delayed and Debated

The SEC was striving to announce its climate disclosure regulations by October 2023, but the commission failed to meet that self-described deadline.

Among the hurdles: The agency is expected to face litigation over the proposed regulations following significant pushback from business interests, Republicans and some Democrats over its plans, Bloomberg law reported. Moreover, the pending rules could face constitution challenges, according to Donald J. Kochan, professor of law and the executive director of the Law & Economics Center at George Mason University’s Antonin Scalia Law School. 

Among the wildcards that all businesses and technology partners need to keep in mind: If the finalized SEC guidance had required Scope 3 emissions disclosures, then publicly held businesses will need to call on their suppliers and partners -- businesses of all sizes, upstream and downstream -- to proactively share carbon emissions data.

What types of emissions data will publicly held businesses need to collect? Scope 3 reporting is quite complex since it spans 15 emissions factors -- everything from upstream transportation and distribution carbon emissions, to end-of-life treatment of sold products.

SEC Climate Disclosure Regulations: Fueling ESG Software Demand?

Translation: IT consulting firms and technology could have their hands full setting up and monitoring Scope 1, Scope 2 and Scope 3 emissions data for customers -- and their own businesses. Amid that backdrop, annual spending on ESG reporting software is expected to reach $1.5 billion by 2027, up from $700 million in 2022, according to research from MarketsAndMarkets. That's a compound annual growth rate (CAGR) of 15.9%.

With an eye toward the potential SEC regulation, businesses should take these four steps to prepare for the SEC climate rule, according to EY.

Note: This blog was originally published on November 20, 2023. Updated regularly thereafter.