SEC’s climate disclosure proposal hits nerves

Sustainable investors say it should go further while opponents claim the SEC lacks authority to pass a rule


Emile Hallez

The SEC’s ambitious plan to make public companies report their climate risk is getting mixed reception from the investing world, with Scope 3 emissions disclosure among the most controversial aspects.

The agency’s already extended deadline for public comments passed last week for its more than 500-page proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors.

The proposal would make many public securities issuers disclose their carbon footprints, requiring Scope 1 and 2 emissions, or those that related to their operations, to be verified by independent third parties. Wide-ranging Scope 3 emissions, which can pertain to everything a business sells, would also have to be reported by many large companies, as would their reliance on carbon offsets in meeting emissions reduction goals.

The proposal received wide support from the Consumer Federation of America, the Natural Resources Defense Council, a group of Congressional Democrats and others. Those against it include numerous fossil-fuel and other industry groups, attorneys general from conservative-leaning states and Congressional Republicans.

Industry stances

Financial services firms that specialize in sustainability overwhelmingly supported the most stringent requirements, in most cases asking the Securities and Exchange Commission to go further – such as making public companies disclose climate-related lobbying activity in addition to emissions and climate risk.

But more traditional firms and industry groups asked the regulator to ease up on the Scope 3 requirements and others, citing burdens on public companies that they said could lead to misreporting.

SEC commissions voted three to one in March to move forward on the proposal, with Commissioner Hester Peirce, the only conservative member at the time, opposing it. Peirce contested the SEC’s authority in requiring climate-related disclosure as well as whether carbon emissions can be considered material, themes echoed by numerous groups that sent letters wholly against the proposal.

The commission could vote later this year on a final version of the rule.

As of June 17, the comment period deadline, the SEC had received thousands of responses.

Living in a material world

Sustainable investing proponents pointed to what they see as a loophole in the Scope 3 reporting requirements – that companies can self-determine whether their emissions in that category are material, and thus whether they choose to report them.

For example, San Francisco-based Parnassus asked the SEC for mandatory Scope 1 and 2 reporting for all issuers, as well as Scope 3 reporting for all but the smallest public companies.

“[Small reporting companies] and emerging growth companies should, however, disclose Scope 3 emissions when such emissions are considered material and/or when they have public net zero or greenhouse gas emissions reduction targets,” the Parnassus letter read.

Another firm, Veris Wealth Partners, said the materiality test for Scope 3 reporting should be nixed.

“Relying on companies to make their own determinations of what is a material Scope 3 emission may lead to incomplete or inconsistent reporting,” that firm wrote. “If the materiality provisions are not removed, the SEC must provide clear guidance to companies about their Scope 3 reporting obligations.”

Veris and other commenters also pointed to the impact of the energy transition on indigenous communities, asking the SEC to take those into consideration.

“We recommend that the commission enhance the proposed rules by explicitly referencing Indigenous Peoples,” that firm wrote. “The mining of transition minerals, such as lithium, cobalt, copper and nickel, may be located on Indigenous lands and have long-lasting effects on the lives, cultural practices and livelihoods of Indigenous populations.”


Praxis Mutual Funds and Everence Financial also questioned the materiality test for Scope 3 reporting, and they asked for other requirements around third parties that verify emissions data.

“Companies should report the methodologies used by third-party firms that provide their disclosure assurance. In addition, the SEC should provide guidance on standards for third-party verifiers who are not accredited with the Public Company Accounting Oversight Board,” those companies noted.

Morningstar called for a wider application of third-party verification, stating it should also apply to Scope 3 emissions reporting. The company nudged the SEC for disclosure around assets affected by physical risks caused by climate change as well are reporting on financing of transition plans.

“Climate-related governance information should be included in a registrant’s proxy statement because strong climate-related governance is simply good corporate governance,” Morningstar’s letter read.

“The commission should mandate disclosure in proxy statements of how executive remuneration and incentive pay arrangements reflect climate-related goals, including emissions targets.”

Wider investment industry

T. Rowe Price was among those asking for clearer definitions of materiality, suggesting the SEC to go with a uniform, widely accepted standard.

That company also requested the SEC to tap the brakes on its Scope 3 emissions disclosure requirements, asking for those to be phased in “once sufficient experience has been gained reporting Scope 1 and Scope 2 [greenhouse gas] data consistently and accurately.”

Further, T. Rowe asked the regulator to potentially wait on the third-party auditing requirement for Scope 1 and 2 emissions, in order to give those auditing firms time “to develop the necessary expertise in the timeframe set forth in the proposed rules to provide assurance of sustainability disclosures.”

Among those asking for more time on Scope 3 were the Investment Adviser Association and Investment Company Institute, in part because a methodology to measure those emissions has not be agreed on, the groups noted.

Authority question

Some groups are claiming regulatory overreach, repeating concerns Commissioner Peirce raised during her speech against the proposal.

The US Chamber of Commerce, for example, wrote that the “proposed rules as currently crafted, exceed the SEC’s lawful authority and are vast and unprecedented in their scope, complexity, rigidity and prescriptive particularity.”

A group of attorneys general from 24 states wrote in a comment letter that the proposed rule would do nothing to protect investors.

“The proposed rule seeks to recast the commission’s statutory role and remake the federal securities disclosure regime, all in an ill-advised misadventure into environmental regulation,” the stated.

“It pushes naked policy preferences far afield of the commission’s market-focused domain.”

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