The Securities and Exchange Commission’s proposed rule to require disclosure by corporations on climate-related financial risk creates a gray area for how suppliers and other third parties address their own emissions and may limit its benefit for the environment, according to advocates and corporate attorneys.
Spanning more than 500 pages, the rule published Monday largely satisfies calls from transparency advocates, investors concerned with environmental, social and governance issues, and Democrats to address the lack of standardization of information on emissions by big companies.
If finalized, public companies would have to report on Scope 1 and Scope 2 greenhouse gas emissions, which address direct and indirect emissions from purchased electricity and other forms of energy. Companies would also have to disclose the oversight and governance practice and how climate risks have had or will have a material impact on business.
However, the proposed rule stops short of requiring disclosure about Scope 3 emissions by partner companies down the supply chain for all issuers. It contains multiple caveats and provisions aimed at balancing the interests of progressives and environmentalists who want full disclosure on all emissions and the concerns from companies about possible legal liabilities of data on indirect emissions.
“The SEC made a concerted effort to support its rationale for requiring Scope 3 disclosures, mentioning ‘Scope 3’ over 400 times” in the proposal, while also acknowledging the “unique challenges associated with their measurement,” said Cynthia Mabry, a partner and co-head of the ESG practice at Akin Gump Strauss Hauer & Feld LLP, in an interview.
