U.S. businesses may be required to report emissions, climate risk

On 21 March, the U.S. Securities and Exchange Commission (SEC) proposed rules that would require publicly traded companies to disclose their contributions to and risks from climate change. The rule, which would go into effect in December, would standardize a climate disclosure process that has thus far been ad hoc and inconsistent across U.S. businesses.

“Investors need reliable information about climate risks to make informed investment decisions.”

“If adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” SEC Chair Gary Gensler said in a statement about the proposed rules. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”

“The Enhancement and Standardization of Climate-Related Disclosures for Investors” proposal would require companies to separately disclose their direct greenhouse gas emissions, called Scope 1 emissions (such as those generated at company-owned facilities like production and distribution sites) and their indirect greenhouse gas emissions, called Scope 2 emissions (such as those produced by a company’s suppliers). Companies would also be required to disclose their decisionmaking process for evaluating climate-related risks, their transition plan for managing climate risks, how the company plans to meet its climate-related targets or goals, and how climate-related events like severe weather will impact financial statements. (Read a summary of the proposed rules here.)

Leveling the Playing Field

One component of the proposal that environmental groups have praised, and some corporate groups have likewise criticized, is the requirement to calculate and report Scope 3 emissions data. These are indirect greenhouse gas emissions that come from upstream or downstream business activities, including from consumers.

“Strong provisions for disclosure of Scope 3 emissions, which include those resulting from consumption of a company’s products, will be particularly important as they account for 80–90% of the oil and gas sector’s total emissions,” Kathy Mulvey, accountability campaign director for the Climate and Energy Program at the Union of Concerned Scientists, said in a statement. “Standardizing disclosure requirements will…ensure investors have consistent and comparable data to make fully informed decisions and hold corporations accountable for their response to climate change. Protecting our financial system from climate-induced risk protects us all.”

“Uniform climate risk disclosures will level the playing field and limit companies’ ability to greenwash and make unsubstantiated emissions reduction pledges.”

League of Conservation Voters government affairs advocate David Shadburn said in a statement, “Shareholders deserve to understand and be protected from the increasing climate-related risks of the companies they are investing in, and today’s reasonable proposal from the SEC is a good step towards better transparency and standardization.…Uniform climate risk disclosures will level the playing field and limit companies’ ability to greenwash and make unsubstantiated emissions reduction pledges.”

Many U.S. businesses already report their greenhouse gas emissions to some degree in their annual sustainability reports and investor updates. But although such reporting has been encouraged by the SEC in the past, there is currently no federal requirement to do so or a set of standard requirements on what to report. For example, Coca-Cola has disclosed emissions from its facilities, suppliers, and customers in making and consuming its products; Tesla, however, has disclosed emissions only from its Model 3 line of cars and suggests that others view those as a proxy for the company’s total emissions impact.

If adopted, these rules would bring the United States more in line with other countries and international entities with mandatory climate risk reporting, including Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom. The proposed rules would be phased in over a few years and contain exceptions for small business. Critics of the proposal are likely to challenge its Scope 3 requirements and whether the SEC would exceed its authority by regulating and enforcing climate change policy. The proposed rule is currently open for public comment.