SEC Ruling Might Slow, But Won’t Stop, Climate Transparency
The heated debates and lengthy delays seemed to hint at what was coming regarding expanded climate disclosure rules from the U.S. Securities and Exchange Commission (SEC), and last week’s unveiling confirmed it.
Two years after the rules proposal and more than 24,000 comment letters received, nation’s top financial regulator issued an 886-page ruling that that was labeled as “weakened” and “watered down,” including no reporting requirements for Scope 3 emissions that make up the largest share of most companies’ greenhouse gas (GHG) output.
The SEC’s final product surprised few observers, satisfied no climate activists and galvanized an army of lawyers for the inevitable slew of court challenges. However, it’s likely to only slow, not stall, companies’ climate disclosure responsibilities — not with such states as California, the European Union and other countries accelerating GHG reduction legislation.
Thomas W. Derry, CEO at Institute for Supply Management® (ISM®), says he wasn’t surprised that Scope 3 reporting was left out of the SEC’s final rule. It’s unfair for companies to be subjected to penalties on Scope 3 measuring that remains an inexact science, he adds: “Maybe technology will get us there as we map supply chains more efficiently over time, but we’re not there yet.”
Despite the absence of reporting on Scope 3 (emissions largely from supply chain operations), the final rule marks a significant shift in publicly traded companies’ climate-impact disclosures. Scope 1 (from company operations) and Scope 2 (from energy use) emissions reporting will be required from large companies if such information is “financially material.” That’s up to a company’s discretion but could be difficult to avoid, given that environmental, social and governance (ESG) investors have become increasingly important to investors.
Some Data Is Already Reported
As SEC chair Gary Gensler noted often through the discussion process, much of the now-required information is already publicly disclosed by many large companies in their annual financial statements and ESG reports. He said in a press release, “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today.”
Other disclosure requirements — which begin in 2026 and are phased in over time — include (1) governance and risk-management processes, (2) disruption impact on a company’s strategy and business model and (3) climate targets and goals. The climate reports must be included in a company’s SEC filings, with potential penalties for inaccuracies.
According to researchers at Deloitte, “The final rule significantly expands a registrant’s disclosure requirements, and the vast majority of companies will need to use the transition period to develop their reporting capabilities, data requirements and processes and controls,” their report states.
Where does that leave supply chains, which account for most of global GHG emissions? According to preliminary findings from ISM’s 2024 Sustainability Study, while a third of survey respondents indicated their companies collect and/or report GHG emissions data, more than 45 percent said their organizations have no plans to do so this year.
Three-quarters (75 percent) said their companies have designated Scope 1 reduction goals by 2030, while 63 percent have Scope 2 goals and 55 percent Scope 3 goals. The SEC’s punting on Scope 3 could push back 2030 targets at companies that, Derry says, “can make an easily defensible decision to focus on other priorities right now. Companies exist to make a profit, but it makes sense to get started on the compliance piece, because it’s coming.”
No Escape From Sustainability Standards
Scope 3 data quality can be lacking, as it is reliant on third parties near and far, and reporting standards and models are still evolving. “I would say we’re at least 10 years away from meaningful Scope 3 disclosures,” says Derry, who adds that an absence of federal reporting requirements buys time for the science of data collection to progress and companies to develop strategy with suppliers.
“It gives companies a chance to get the math right,” he says. “And it’s a fact that most CPOs have not had meaningful conversations with their suppliers on managing emissions, which needs to happen if (companies) are going to be accountable for them. … because it’s only a matter of time.”
Overseas regulations have not moved at the glacial pace of those in the U.S.; the first required reports on Scope 3 emissions and other climate disclosures under the European Union’s Corporate Sustainability Reporting Directive are due in 2025. And the most powerful mandate could be from consumers, many of whom continue to convey that sustainability is an important consideration in their purchasing decisions.
“There will still be philosophical disagreements or issues with the legal complexities (of climate reporting),” Derry says. “But we do know this is becoming more of an area where consumers decide the companies they will and won’t do business with. It’s a chance for companies to enhance their brand and win customers from the competition.”
He concludes, “You may disagree on the methods or the SEC’s authority on the matter, but on the general issue of climate transparency, the moment is arriving. Your company should try to be one of those that’s on the right side of history.”
(Photo credit: Getty Images/Boryak)