In August, the U.S. Environmental Protection Agency (EPA) received $5 million from Congress under the Inflation Reduction Act (IRA) for programs to boost voluntary corporate climate reporting while the U.S. Securities and Exchange Commission (SEC) ramps up for legal battles regarding its upcoming mandatory climate change reporting rules.
To report or not to report
Many companies have jumped onto the net-zero emissions bandwagon and have voluntarily publicized net-zero emissions commitments without figuring out the details involved. With the SEC’s proposed rule on the horizon, now is the time to figure it out.
In March 2022, the SEC proposed rule changes that will require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, as well as certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas (GHG) emissions.
The proposed rules will require a registrant to disclose information about its direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3).
“The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies,” according to an SEC press release.
The proposed Scope 3 emissions reporting has many in industry perplexed and scratching their heads trying to determine how to be accountable and accurate in reporting these details.
How do you calculate and include emissions from employee commutes and global supply chains? With worldwide supply chains, there are private suppliers and supply companies in other countries that are not subject to emissions disclosures. Additionally, many supply chains have multiple layers, meaning one company in the chain does excellent reporting, but farther down the chain, there is little to no data available.
Public comments on the proposed rule include a comment from BlackRock Inc., one of the largest money management companies, which voiced some concerns: “We do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control.”
The key challenge for companies in reporting this data is a “lack of ambition, focus, or urgency at the board and management level, especially when companies are still trying to figure out their climate ambition and the extent to which they want to report it publicly,” said Shally Venugopal, North American Lead for Vivid Economics, in a McKinsey & Company podcast transcript. “Another issue we hear about are decentralized execution teams that lack sufficient resources or a holistic direction. The SEC’s proposed rule makes clear the importance of finance, strategy, and risk collaborating to pull together a coherent investor story.”
SEC regs have teeth, don’t they?
Running afoul of any government agency regulations is never a good idea, and this, of course, includes the SEC—unless, that is, you can challenge those regulations in court and have them vacated or at least get a temporary stay issued.
Three top Republicans sent SEC Chairman Gary Gensler a letter dated September 22, 2022, requesting that he explain the statutory authority for several proposed SEC rules, including climate disclosures. The letter, signed by Representatives Patrick McHenry of North Carolina, Kay Granger of Texas, and James Comer of Kentucky, specifically mentioned the “major questions doctrine” raised by Chief Justice John Roberts in West Virginia v. EPA.
“Although Article I, Section 1 of the United States Constitution vests ‘all legislative powers’ in Congress, the Biden administration has largely relied on executive action to advance its radical agenda,” the letter states. “For example, in his first year, President Biden issued more executive orders and approved more major rules than any recent president. Such reliance on the administrative state undermines our system of government. Our founders provided Congress with legislative authority to ensure lawmaking is done by elected officials, not Executive branch staff. Given this administration’s track record, we are compelled to underscore the implications of West Virginia v. EPA and to remind you of the limitations on your authority. … [The] Court’s decision casts doubt on the [SEC’s] authority to develop, finalize and implement a broad swath of regulations.”
Considering current political pressures, analysts are certain the proposed climate disclosure rulemaking will face tough legal battles should it be published with similar language to the proposed rulemaking. Furthermore, in considering the climate within the U.S. Supreme Court (SCOTUS) and its decision in West Virginia, opponents of the rule are confident it will be squashed by the high court.
“At the SEC, Chair Gary Gensler is trying to create climate reporting rules that will survive legal challenges aimed at whether the agency has authority to mandate the environmental disclosures, which opponents say aren’t always material to investors,” reports Bloomberg Law.
What about the EPA and voluntary GHG emissions reporting?
The money from the IRA for the EPA is meant to “bolster the agency’s climate change partnership programs, a suite of voluntary alliances under which companies such as Apple Inc., Walmart Inc., and General Motors Co. make commitments to the agency and the public about their climate goals, according to a Democratic congressional aide who worked on the language,” Bloomberg Law adds.
The funds are expected to be utilized to help standardize corporate emissions reduction plans and commitments and make them more transparent.
Clear-cut congressional instructions on how to utilize the funding are lacking, but according to Bloomberg Law, the aide stated that “congressional Democrats anticipate the agency spending it on computer programs, new climate models and other types of technology.”
“To Anne Idsal Austin, former chief of the EPA’s air office under President Donald Trump, the funding is ‘a solution looking for a problem,’” Bloomberg Law continues. “The data that companies feed to the agency under the climate change partnerships is already robust and standardized, she said.”
“‘These folks are operating under state and federal permits, and the methodology and type of data requested by EPA is vetted by EPA,’ said Austin, now a partner at Pillsbury Winthrop Shaw Pittman LLP. ‘If EPA had a real concern about the veracity of the data that was being submitted, I feel like we would’ve heard about that before.’”
Shared authority
Both agencies claim authority over corporate climate disclosures.
The SEC authority comes from the Securities Act, which states the SEC has “broad authority to promulgate disclosure requirements that are ‘necessary or appropriate in the public interest or for the protection of investors.’”
EPA authority is provided under the Clean Air Act (CAA), which gives the EPA the authority to collect “[GHG] data from certain sources including large direct greenhouse gas emitters, fuel and industrial gas suppliers, and carbon dioxide injection sites in the United States. EPA is authorized to collect this data ‘[f]or the purpose of developing or assisting in the development of’ standards, regulations, and plans to control air pollution under the [CAA].”
Different goals
“The nature of the information that would be reported under SEC’s proposed climate risk disclosure rule versus EPA’s [Greenhouse Gas Reporting Program (GHGRP)] is notably different,” states an EPA comment letter submitted upon the SEC’s proposed rulemaking. “The EPA GHGRP requires certain facilities to report their emissions of GHGs while the Proposed SEC Rule requires registrants to disclose information about climate-related risks, which includes information on GHG emissions.”
Reporting distinctions
| SEC proposal | EPA GHG reporting | |
| Level of reporting | Firm level | Facility level for direct emitters and producers; firm level for importers and exporters |
| Universe of facilities | Publicly traded firms regardless of their emissions level | Facilities and GHG and fuel suppliers that fall into 1 or more of 41 industrial categories and that, in general, emit or supply 25,000 metric tons carbon dioxide equivalent (CO2e) or more (discussed further below) |
| Third-party verification | Yes, for Scope 1 and 2 | No, the EPA verifies. |
| Threshold for reporting | Different categories or timelines, depending on size and status. Groups include large accelerated filers, accelerated filers, nonaccelerated filers, and smaller reporting companies (SRCs). | Facilities or suppliers are generally considered to exceed the threshold if: GHG emissions from covered sources exceed 25,000 metric tons CO2e per year.Supply of certain products would result in over 25,000 metric tons CO2e of GHG emissions if those products were released, combusted, or oxidized. For facilities and suppliers in some industrial categories, there is no threshold for initial reporting, but these facilities and suppliers may exit the program if their emissions or supplies fall under 15,000 metric tons CO2e for 3 consecutive years or under 25,000 metric tons CO2e for 5 consecutive years. |
| Scope of emissions | Scope 1 and 2; Scope 3 for some firms | At this time: Scope 1 for direct emitters, while suppliers report the quantities they supply—similar to downstream Scope 3 reporting |
| Domestic vs. international emissions | Domestic and international firms (especially considering Scope 3) | Facilities and GHG suppliers located in the United States and its territories |
“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” said Gensler in a press release. “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.”
Investors should not have to turn to the EPA for climate disclosures, said Steven Rothstein, managing director of the Accelerator for Sustainable Capital Markets at Ceres, a nonprofit organization founded by investors and environmentalists, according to Bloomberg Law.
“They need a clear, consistent format for information,” Rothstein said. “This is a positive development, the additional funds for the EPA, but it does not replace the need to have things in their financial reports.”