New SEC climate rule leaves progressives wanting more

The Securities and Exchange Commission (SEC) took a long-sought step this week by proposing to require that publicly traded companies disclose their direct and indirect climate change contributions, but advocates are pointing to loopholes they say the firms could exploit.

While the proposal would require a company to disclose all of its direct emissions, it only required them to disclose indirect emissions — those from its supply chains and the use of its products — when they are “material” to investors.

Progressives expressed concerns that the rules could leave it up to companies to decide whether to reveal these emissions, which, depending on the industry, can make up a major proportion, or even a vast majority, of their climate contributions. 

Lena Moffitt, chief of staff at environmental group Evergreen Action, said that without clearer requirements on who needs to disclose this type of emissions, “you run the risk of that essentially being a backdoor way to make this rule voluntary.”

“We know that voluntary initiatives don’t work. This needs to be clear, consistent and mandatory,” Moffitt said. 

If finalized, the SEC’s proposal would establish requirements for publicly traded companies to tell their investors how climate change impacts their financial stability, and how much they emit.

It would mandate that firms disclose emissions from both their direct operations, called Scope 1, and emissions from energy they purchase, Scope 2. 

In certain cases, it would also make them disclose emissions that they indirectly cause, such as those stemming from the products they sell, known as Scope 3 emissions. 

The rule explicitly requires companies that have pledged to reduce their Scope 3 emissions to disclose them to investors. 

It also requires Scope 3 emissions to be disclosed when they are “material,” referring to information that would influence investors’ decisions to buy or sell — which has become a flashpoint in the past year’s debate over what form of climate disclosure the government should require.

The conservative position — held by SEC Commissioner Hester Peirce (R), who voted against the new rule, as well as by former Commissioner Elad Roisman (R)  — is that any climate disclosures that are material are already legally required, and that no further mandate is necessary. 

On Monday, the SEC rejected this view, as well as calls to limit disclosure requirements to just Scope 1 and Scope 2. It’s a significant step, because for some industries, such as producers of fossil fuels and automobiles, the emissions that come from their products — Scope 3 —are the greatest source of their contributions to climate change. 

And climate and financial transparency advocates say that for such industries, these emissions can be the most important to disclose to get a complete picture, giving the example of makers of gas-powered and electric vehicles, whose operations may look similar, but whose products have vastly differing climate impacts. 

“If you take two auto companies — Tesla and General Motors — and you look at the Scope 1 and 2 emissions from building automobiles, you’re going to find relatively comparable results,” Ivan Frishberg, the chief sustainability officer at Amalgamated Bank, said during a briefing for reporters last week. 

“It’s really when you come to Scope 3 that you understand what the associated emissions are,” he added. 

While the rule doesn’t explicitly require any industry to reveal these indirect emissions, it does highlight the auto industry, saying that its Scope 3 emissions can help determine how much it will be affected by regulations and initiatives supporting a switch to electric vehicles. 

The SEC goes even further with “oil and gas product manufacturers,” saying these types of emissions “are likely to be material and thus necessary to an understanding of a registrant’s climate-related risks.”

Outside experts, however, are calling for a universal Scope 3 requirement, saying that the current language leaves companies with too much leeway. 

“I’m quite worried that there’ll be companies trying to make arguments that they don’t think it’s material for them, or it’s outside of their control,” said Alex Martin, a senior climate and finance policy analyst at Americans for Financial Reform.

Martin also raised concerns that the SEC will be reluctant to enforce inaccurate reporting since the Scope 3 standard comes with a “safe harbor” that would prevent errors and misstatements from being considered fraud unless they were made in bad faith. 

“The fact there’s a safe harbor…means that there’ll just be a lower-level scrutiny from both the SEC [and] a lower level of liability concerns for shareholder-brought action,” he said. “I still think that there could be options for accountability, but it’s quite lower-level.”

Another element of disclosure that some groups asked for, but did not receive, concerned political spending, particularly to dark money groups.

“We believe disclosure of corporate political spending needs to be included as part of climate change disclosures,” the Association of Federal, State, County and Municipal Employees, a trade union of public workers, wrote the SEC last year.

The association pointed to “multiple examples of the energy industry’s involvement in campaigns that solicit criticism from outside groups, some of which it finances or staffs, to create the impression of broad-based support for positions.”

The question of how much to make companies disclose — and how legally binding those disclosures should be — have been the most controversial elements of the SEC proposal, with investor groups, fossil fuel companies and progressive regulators all staking out different positions in recent months.

Groups representing fossil fuel interests have said they didn’t want any type of Scope 3 disclosure requirements. 

“Many climate-related risks cannot be quantified, or, if the risk were to be quantified, many assumptions and speculations would be required,” wrote the National Mining Association, which represents the coal industry. “Quantitative metrics should be limited to the company and should not extend upstream or downstream.”

But supporters of Scope 3 disclosure have pushed back on this notion, pointing out that some companies are already doing it.

“It takes some work to get your systems together, but that’s work that every company should be doing anyway,” Frishberg told The Hill. “Apple has been doing this and BlackRock did it…there’s data quality improvements that we all look for, but there’s a lot of companies already doing it,”

Meanwhile, large investor and corporate groups such as BlackRock — a major lobbyist for climate disclosure rules in general — have requested more or less what the SEC delivered: a “phased” Scope 3 reporting requirement with a generous “safe harbor” to protect companies from liability while their “data and methodologies are still emerging.”

Progressive groups such as Public Citizen and legislators including Rep. Sean Casten (D-Ill.) and Sen. Elizabeth Warren (D-Mass.) have lobbied for highly stringent Scope 3 emissions, including “greenhouse gas emissions resulting from real economy activities that issuers finance or underwrite,” as Public Citizen requested last year — what are known as “financed emissions.”

SEC Commissioner Allison Herren Lee described what they ultimately came up with as “measured and balanced” for all parties involved.

“It takes a measured and balanced approach to climate disclosure, building upon current market practices, including proposed accommodations for smaller companies, balancing principles-based requirements with the need for climate-related metrics, phasing in certain requirements over time, and even providing a safe harbor for the disclosure of Scope 3 emissions,” she said in a statement.