U.S. Securities and Exchange Commission Scope 3 Emissions Report
True to its word, the SEC released its proposed rulemaking, The Enhancement and Standardization of Climate-Related Disclosures for Investors, last week. The rule would require companies to disclose a wide variety of climate-related information, including information about climate-related risks that are reasonably likely to have material impacts on their business and/or consolidated financial statements, and measurements of greenhouse gas (GHG) emissions. that could help investors assess these risks.
Much has been said about the proposed GHG emissions reporting requirements – not only for Scope 1 and Scope 2 emissions (emissions from business operations and the generation of electricity purchased and consumed by the company) – but also for scope 3 emissions, or emissions from activities up and down the value chain of a company. In this article, we will focus on the Scope 3 emissions requirements in the proposed rule.
First, not all companies would be required to report Scope 3 emissions. The proposed rules would require disclosure of Scope 3 emissions only if:
The emissions are significant or if there is a high probability that a reasonable investor would consider them significant when making an investment or voting decision; or
The company has set a GHG emissions reduction goal or target that includes its scope 3 emissions.
In limiting the reporting requirement, the SEC sought “[t]o Balance the importance of Scope 3 emissions with the potential relative difficulty of data collection and measurement. . . .”
The SEC declined to propose a quantitative measure for determining the materiality of Scope 3 emissions (although the proposed rule notes that some companies rely on such a measure, and it also invites additional comment on the advisability of including such a measure). Instead, he proposed using his commonly known standard of materiality, explaining that a “one size fits all” approach would not capture the variability in regulatory, policy and market conditions between companies, nor would it adequately capture transition risk, which is linked to GHG emissions and the choices a company can make in its value chain because of them.
For companies that have set a GHG emissions reduction goal or target, the proposed rule states that disclosure is necessary to help investors understand the potential costs associated with achieving such a goal and to track the business progress along the way.
So what are Scope 3 emissions? As explained above, Scope 3 emissions are those from activities up and down a company’s value chain. Here are some examples of these upstream and downstream activities:
Goods and services purchased;
Transport and distribution of purchased goods, raw materials and other inputs;
Waste generated during operations;
Employee business trips and home-work journeys;
Transportation and distribution of sold products, goods or other outputs; and
End-of-life treatment of products sold by a company.
Scope 3 emissions data is difficult to collect and quantify, but the SEC hopes companies required to report will be able to influence their value chain activities and collect emissions data in the process :
“While a registrant may not own or control the operational activities in its value chain that produce Scope 3 emissions, it can nevertheless influence those activities, for example by working with its downstream suppliers and distributors to take action to reduce those entities’ Scope 1 and 2 emissions (and thereby contribute to reducing the registrant’s Scope 3 emissions) and any associated risk. be able to mitigate the challenges of collecting the data required for Scope 3 disclosure.”
The proposed rule suggests that Scope 3 emissions data can be found in the following sources:
Emissions reported by parties in the reporter’s value chain, and whether these reports have been verified by the reporter or a third party, or unverified;
Data relating to specific activities, as declared by parties in the declarant’s value chain; and
Data from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including averages of emissions, activities or industry economic data.
Companies required to report Scope 3 emissions must do so individually (i.e. listing emissions of each GHG) and also on an aggregate basis (carbon dioxide equivalent). They must also report GHG intensity, or the ratio of the impact of GHG emissions per unit of total revenue and per unit of output. Risks associated with climate change should also appear in a company’s financial statement metrics, with some metrics (for scope 3 emissions, consider transition risk) to be included in a note to a registrant’s audited financial statements. . Finally, if a company is required to report historical data on its income statement and cash flow statement, it should be prepared to do the same for emissions data (to the extent that such emissions data is reasonably available).
The proposed rule would phase in Scope 3 emissions reporting, with the first reporting required for large expedited reporters in fiscal year 2024 (filed in 2025). Small reporting companies would be exempt from Scope 3 emissions reporting requirements.
The SEC is seeking comments on the proposed rule. The comment period will remain open until at least May 20, 2022.
Copyright © 2022 Robinson & Cole LLP. All rights reserved.National Law Review, Volume XII, Number 87