New SEC rule would not require farmers to report emissions

As the U.S. Securities and Exchange Commission’s (SEC) gears up to release its climate emissions disclosure rule, the clamor from its detractors is steadily rising. Despite the impending official publication, the fight against the rule is far from over. The continued protests against the regulation contradict the significant support from financial institutions and the burgeoning necessity for a comprehensive rule. If investors want to see an SEC rule that will provide them meaningful information, they must start dispelling myths propagated by the opposition and consistently express their backing for the disclosures.

In comments submitted to the SEC, roughly 97 percent of asset managers and investment companies favored broadened climate emission disclosure rules, terming them as financially relevant information. Interestingly, 69 percent of these comments also endorse the disclosure of Scope 1, 2, and 3 greenhouse gas emissions as a fundamental requirement of the rule. 

Investors have clearly voiced their demand for comprehensive climate-related financial disclosures, inclusive of Scope 3 requirements. The mounting physical impacts of climate change and accelerating climate transitions necessitate the availability of consistent, comparable information on material climate risks. As climate change risks and opportunities grow, having access to emissions disclosure data becomes crucial for mitigating potential threats in their portfolios. 

The SEC’s attempt to set rules requiring U.S. businesses to report their climate emissions is a significant step forward in granting investors the desired transparency. These rules equip all investors with the resources to analyze climate-related financial data in a standardized format, providing insights into businesses that are best prepared to respond to the market shifts driven by global decarbonization or withstand escalating physical climate impacts.

The SEC deems climate emissions as material information primarily due to investors’ demand for climate-related financial disclosures. The U.S. Supreme Court defines material information as something that “a reasonable shareholder would consider important in deciding how to vote.” Thus, the majority of U.S. investors significantly influence what information is critical enough to affect voting decisions. 

Despite clear investor support, powerful entities are opposed to most potential versions of the SEC rules, leading to a surge in misinformation and rumors about the impacts of these rules, particularly concerning Scope 3 emissions.

Scope 3 emissions are indirect emissions produced within a company’s value chain, like emissions from supply chains or from consumers using a company’s product. These emissions are essential for investors to understand as they constitute a significant portion of some companies’ total emissions — sometimes as much as 80-90 percent.

This is particularly true in the food and agricultural sector, which is disproportionately vulnerable to climate risks. Policies aimed at ending deforestation, for example, could drive 10 percent of global agricultural land to revert to forests, significantly affecting future agricultural production.

Yet, the conversation around Scope 3 emissions and the SEC rule is often overshadowed by strong opposition. Critics, including some members of Congress, advocacy groups, and coalitions argue that the rules could drive U.S. farmers and ranchers out of business due to emission measurement and reporting requirements. 

The SEC rule, however, does not mandate farmers and ranchers to report their emissions under any drafts of their regulations. The rule simply requires publicly traded companies to disclose emissions, using industry averages and other data for estimation, with liability protection for any estimation errors. No action is necessary from farmers or ranchers to measure their emissions under the proposed SEC rule. 

The argument that disclosing Scope 3 emissions disclosure is burdensome or impossible is an attempt to maintain the status quo, leaving investors in the dark about climate-related risks. This misconception, if endorsed by the U.S. public, courts, and lawmakers, could encourage legal challenges against the SEC rule. Therefore, it’s essential for investors to debunk these myths now to secure the rule’s future and to ensure transparency about climate-related financial risks. 

Investors recognize the immense value of Scope 3 emissions disclosure and have communicated this to the SEC. However, the ongoing campaign against Scope 3 disclosures and the rumors about the rule’s impact on small agricultural potentially could potentially eclipse the demands of the “reasonable investor.” To counter this and ensure the SEC rule’s survival against the expected backlash, investors must magnify their voices in support of these disclosures.  

Niamh McCarthy is director of Orbitas and climate-related risk director at Climate Advisers.