US Financial Regulators Weighing Scope 3 Disclosures

As US financial regulators mull requirements for publicly traded companies to disclose climate risks, they are considering how to address Scope 3 and other indirect emissions along a company’s value chain, an issue closely watched by oil firms. The US Securities and Exchange Commission (SEC) has been under pressure from institutional investors, investment managers, activists, and the Biden administration to set firm rules requiring companies to disclose climate risk data. While the Biden administration directed the SEC to explore the issue, it is still not clear exactly what requirements the commission will pursue (NE Mar.4'21). SEC Chair Gary Gensler in recent remarks gave signals that the commission is pursuing regulations that could require Scope 1, Scope 2, and possibly Scope 3 disclosures. Already, many publicly traded companies are disclosing Scope 1 and 2 emissions -- direct emissions and those emitted from purchased electricity generation. Gensler said Jul. 28 that "investors are looking beyond those" -- which presumably could include investors calling on more energy companies to disclose Scope 3 emissions from the end-use of fossil fuels. In remarks to the group Principles for Responsible Investment, Gensler said he asked SEC staff for recommendations on whether to address Scope 3 disclosure requirements, and "how and under what circumstances to manage such disclosures." Gensler also said the commission is considering whether to set specific metrics for certain sectors, although he did not name the oil and gas sector. He said he has tasked the commission with considering requirements for a "variety of qualitative and quantitative" factors in climate risk disclosures. "Qualitative disclosures could answer key questions, such as how the company's leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy," he said. "Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals." The SEC took comment through early summer on the rulemaking, and Gensler noted Wednesday that 75% of stakeholder comments support mandatory disclosure. Potential mandates for disclosing Scope 3 emissions are a particularly thorny issue for the US oil lobby, although most major US oil companies, including Chevron, Exxon Mobil, and Occidental Petroleum, already disclose them. But the American Petroleum Institute (API), which has pushed back against mandatory SEC requirements, rolled out a template last month for voluntary disclosures that did not include Scope 3 emissions. "Every company has a unique approach to achieving these goals, including consideration of Scope 3 emissions that result from activities outside of a company’s operations," API's vice president of corporate policy, Stephen Comstock, said. The US is "overdue" to address climate risk requirements, argues Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets of sustainable investing group Ceres. Rothstein added that countries leading on comprehensive climate action have already involved financial regulators, yet the SEC has not issued a directive on environmental, social and governance since 2010, which was guidance only. Ceres backs a rulemaking that includes mandates for Scope 1, 2 and 3. In some cases, Rothstein added, Scope 3 emissions can account for the biggest swath of a company’s footprint -- for example banks that finance fossil fuel projects. The SEC has been urged by Ceres and others to use an existing model like the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), which some oil firms already use to guide their disclosures. Gensler noted in his remarks last month that while the G7 recently endorsed the TFCD model, the commission should establish an "appropriate" regime for US markets. Bridget DiCosmo, Washington