SEC Weighs Weakening Climate Disclosure Rule Opposed by Industry

Environmental and investor advocates are bracing for the SEC to release watered-down requirements to report corporate emissions in the wake of business lobbying against sweeping disclosures.

Securities and Exchange Commission officials have met at least four times with representatives of environmental advocate Sierra Club, sustainable investing group Ceres and other supporters of robust climate reporting since late October, agency records show. The organizations long have pressed the SEC to help investors better analyze environmental risks by requiring greenhouse gas emissions disclosures about big companies’ suppliers, as the agency proposed in 2022 along with other reporting about climate change’s effects on businesses.

Disclosures on Scope 3 emissions, which come from companies’ supply chains and other sources they indirectly affect, are the most contentious part of the SEC’s proposal. Republican attorneys general in West Virginia, Florida and other states are threatening litigation and the US Chamber of Commerce and others are angling to stop requirements they consider unduly burdensome and overreaching.

SEC Chair Gary Gensler has publicly acknowledged their concerns and has said changes are possible. The agency is targeting April for the rules’ release, according to its latest regulatory agenda.

“He is trying to set expectations,” said Steven Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets, whose organization met with Gensler’s office in October and November.

An SEC spokesperson said the agency doesn’t comment on “speculation about what may be in or out of a rulemaking.”

But the representative added: “Based on the public feedback, the staff and the Commission consider possible adjustments to the proposals and whether it’s appropriate to move forward to a final adoption.”

Long-Running Fight

Conflict over how the SEC should handle companies’ supply chain emissions predates the agency’s climate disclosure proposal.

Gensler clashed with his fellow Democratic commissioners before the proposal’s March 2022 release over whether to require reporting on Scope 3 emissions. These emissions usually make up a majority of a company’s carbon footprint. That’s compared to Scope 1 and 2 emissions that come from companies’ direct operations and power usage.

The Democratic chair was worried that Scope 3 requirements would bring lawsuits that kill SEC climate disclosure rules, Bloomberg News reported in 2022. But commissioner Caroline Crenshaw and then-commissioner Allison Lee persuaded him to propose the disclosures.

Lee left the commission in July 2022. Democrat Jaime Lizárraga took her seat, joining Gensler and Crenshaw. The SEC’s climate disclosures almost certainly will need the support of all three Democrats for them to take effect. The five-member commission’s two other members—Republicans Hester Peirce and Mark Uyeda—have raised concerns about the proposal and are unlikely to support climate rules backed by any of their Democratic colleagues.

Representatives of the Sierra Club, as well as progressive advocacy groups Public Citizen and Americans for Financial Reform, had a meeting with aides to Crenshaw on Nov. 7, according to an SEC memorandum. They also met on Nov. 3 with officials in the SEC’s Division of Economic and Risk Analysis and Division of Corporation Finance, which are helping draft final climate rules, an agency record shows.

But SEC officials were mum at the time about whether the agency ultimately will require some sort of Scope 3 reporting, said John Kostyack, who represented the Sierra Club at the meetings. Unlike requiring companies to disclose Scope 1 and 2 emissions as the SEC proposed in March, Scope 3 still appears unsettled, he said.

“When we meet with the SEC staff, they’re pretty clear that they’re not at liberty to share what’s in the latest draft,” said Kostyack, founder and principal of Kostyack Strategies.

A representative of Crenshaw didn’t respond to requests for comment. A representative of Lizárraga declined to comment.

Chamber Lobbying

The SEC also is talking with business and farming groups opposed to Scope 3 reporting.

The US Chamber of Commerce has met at least five times with the agency since October, according to agency records. The American Farm Bureau Federation has had at least four meetings with the SEC since that month, as well, commission documents show.

The Chamber’s conversations with the SEC included discussions about Gensler’s upcoming appearance at a climate disclosure event the business group was hosting. Gensler ended up addressing the Chamber on Oct. 26, saying he’s trying to avoid any Scope 3 reporting burdens for private firms that supply big companies, which can provide estimates of those emissions under the SEC’s proposal. The chair added he’d “prefer” that the Chamber not sue the agency.

The Chamber is advising companies to prepare for Scope 3 reporting, but hopes the SEC recognizes it faces significant opposition to this type of disclosure, said Evan Williams, executive director of the group’s Center for Capital Markets Competitiveness. Scope 3 emissions are “difficult to identify and accurately quantify and are uniquely uncertain and speculative,” leading to increased costs for companies, the Chamber said in a 2022 letter to the SEC.

“It’s something that the SEC has to weigh very carefully in terms of softening before it releases a final rule,” Williams said.

Farmers’ Concerns

The farm bureau in a similar vein has pushed the SEC to keep agriculture out of any Scope 3 reporting requirements. Big companies could overwhelm small farmers and ranchers with emissions data requests and could seek other suppliers if they don’t get the information, the bureau and other farming groups said in an April letter to the SEC.

Some Democrats in Congress representing agricultural and small business interests—including senators Joe Manchin of West Virginia, Jon Tester of Montana and Amy Klobuchar of Minnesota—have echoed those concerns.

Manchin has told Gensler that Scope 3 disclosures could be “devastating” for small businesses, while Tester, a farmer, has pressed the SEC chair about “unnecessary red tape.” Klobuchar said in a Dec. 12 letter to Gensler that the agency must balance climate goals and transparency with the needs of small agricultural operations.

“The more I get a chance to talk to Democrats, I think the more they understand what the concerns are and agree with them,” said Travis Cushman, the farm bureau’s deputy general counsel.

California, EU Rules

The SEC recognizes that fewer companies are doing Scope 3 reporting than are making Scope 1 and 2 disclosures, Gensler told reporters in November. The methods for calculating Scope 1 and 2 are further along than the procedures for determining Scope 3, he added.

But California and the European Union have moved to make Scope 3 reporting more commonplace.

California Gov. Gavin Newsom (D) in October signed a law that requires large companies that do business in the state to disclose their Scope 1 and 2 emissions by 2026 and their Scope 3 emissions by 2027. The EU’s Corporate Sustainability Reporting Directive also mandates the emissions reporting for companies that operate in the European bloc, starting in 2024. The California and EU rules are expected to cover thousands of US companies.

The SEC’s proposed emissions reporting would generate fewer new expenses for companies if California already mandates the disclosures, Gensler has said. The agency also plans to work with the EU to ease reporting burdens for companies facing separate US and European rules, he said.

Regardless of whether the SEC requires Scope 3 disclosures, many companies and investors still stand to benefit from them, said Amelia Miazad, a University of California, Davis School of Law professor, who studies environmental, social and governance issues.

“Will it be difficult to measure? Yes. Will it require resources? Yes,” Miazad said. “Is a profit that is generated from markets that require Scope 3 emissions greater than the cost of measuring those emissions? Yes.”