The U.S. Securities and Exchange Commission (SEC) is considering scaling back its proposed climate rules, according to officials who have spoken with lobbyists and corporate executives. The focus of the potential revision is on Scope 3 emissions, which encompass greenhouse gases released by a company’s supply chain and the consumption of its products by customers. The SEC had previously proposed that publicly listed companies disclose their Scope 3 emissions when they are deemed “material” and when reduction targets have been set. However, companies argued that producing such data would be difficult and legally contentious.
This potential move to roll back the Scope 3 requirement would be seen as a victory for corporate interests that lobbied against the changes. It would also deviate from European Union rules, which mandate Scope 3 disclosures for large companies starting in 2024. SEC officials have expressed concerns about the legal vulnerability of mandating Scope 3 disclosures, citing a Supreme Court decision from last year that restricted the Environmental Protection Agency’s authority over greenhouse gas emissions. Some corporate groups and Republican lawmakers have argued that the SEC’s focus on climate change-related issues exceeds its authority and would burden companies with unnecessary requirements.
While SEC officials have not confirmed a final decision on the emission disclosure rules, sources suggest that the agency’s top leadership, headed by Chair Gary Gensler, is leaning towards backing off from making Scope 3 disclosures mandatory. A potential compromise could involve requiring companies that already report Scope 3 emissions for other jurisdictions to disclose them or allowing companies to provide the information separately from regulatory filings to reduce legal liability.
The potential softening of emission disclosures would be a setback for President Joe Biden’s climate agenda. Biden has faced pressure from lawmakers in his party to take more aggressive action on climate change. However, even some advocates of climate action have expressed concerns about the logistical challenges of accurately calculating Scope 3 emissions. Companies would still be required to disclose emissions they directly contribute to, known as Scope 1 and Scope 2. However, Scope 3 emissions represent a significant portion of many businesses’ carbon footprints.
Gensler, a Democrat, would need the support of the agency’s two other Democratic commissioners to pass the rule with a 3-2 majority. Both Republican SEC commissioners are expected to vote against it, with one openly opposing the proposal. Gensler has also raised doubts about the readiness of Scope 3 disclosures.
California has taken a separate approach by passing a law that will require companies operating in the state to disclose Scope 3 emissions by 2027. Gensler has suggested that this could make the SEC’s rule less costly since many companies would already be producing the required information. However, corporate lobbyists argue that companies would still be hesitant to include Scope 3 emissions in SEC filings due to the risk of shareholder lawsuits.
The SEC received approximately 16,000 public comments on the proposed emissions disclosure rules. Gensler has expressed hope that the rules, once finalized and adopted, will withstand any legal challenges.
