Category: Financial Services

By Keaghan Ames, Vice President, BGR Financial Services Practice

When the Security and Exchange Commission’s (SEC) proposed climate disclosure rule was first announced in March of 2022, it consequently caught the attention of every publicly-traded company. In what many consider to be the most onerous enhancement to the securities disclosure regime since the Securities Act of 1933, the rule, if finalized, would change the way publicly traded companies view the climate’s impact and the risks associated not only in their public disclosures but potentially throughout their entire business.

Will Scope 3 be Included and When’s it Getting Finalized?

The two questions everyone is asking: will Scope III be included and when will it be finalized? The final rule has been expected for many months, with initial speculation as to its release beginning in Q3 of 2023. Yet, the rule continues to be delayed. Why?

The short answer is that the decision around whether to include Scope III is dragging the process out, due to the concerns over its ability to withstand legal scrutiny.

The longer answer is that SEC Chair Gary Gensler finds himself in a difficult position. For starters, if Scope III requirements are included in the overall rule, numerous outside groups have publicly warned the SEC it will face litigation, which is the last thing the head of the agency wants. Beyond the very real litigation risk and external political pressures detailed below, there are internal political factors for Chair Gensler to consider as well. The SEC’s decision-making boils down to three viewpoints:

(1) Chair Gensler’s, who would like to see Scope III included, but not at the expense of the rest of his regulatory agenda;

(2) Democratic Commissioner Caroline Crenshaw’s, who believes Scope III should be mandatory and may not vote for any final rule without the inclusion of Scope III (thereby shelving the proposal as any rule would require all three Democratic votes); and,

(3) the Office of the General Counsel’s (OGC), who understands that Scope III is potentially a stretch of SEC authority and contains near-certain litigation risk.

While the rumors will continue to percolate as to when the rule will come out, the real answer is either (a) when these three parties come to an agreement or (b) negotiations end and there is no compromise to be struck between those three viewpoints. If the likelier latter scenario (option B) plays out and Gensler determines that he would like to include Scope III, it is foreseeable that Gensler pushes finalization as close to the Congressional Review Act (CRA) window as possible. The CRA window, Congress’ 60 legislative days-long period of time to overturn any given rule by a majority vote, is usually sometime in mid-May heading into an election year. According to the congressional schedule set by leadership in both Houses, the deadline, for now, is estimated to be May 14, 2024.

At the time of this post, the rule is rumored yet again to come out next month (that being said, the same rumor has circulated every month for the last six months). That timeline is certainly possible, and the public will be given a five-day Sunshine Act notice prior to an open meeting to consider the rule. However, if Gensler was truly worried about balancing the rest of his regulatory agenda (all items require OGC’s attention and focus) and getting the climate disclosure rule with Scope III finalized prior to the CRA window, it would seem fitting that the rule is finalized in late April or early May.

As always, we continue to track developments on the rule and will continue to update the group and your clients accordingly.

Process Background

The SEC’s proposal seeks to standardize climate disclosures through mandatory tiers of climate exposure:

• Scope 1: registrants’ direct greenhouse gas (GHG) emissions;
• Scope 2: indirect GHG emissions from purchased electricity and other forms of energy separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unity of economic value or production; and,
• Scope 3: everything else associated with a company’s activities including emissions from third-party contractors, employee commuting, business travel, purchased goods and services, leased assets, etc.

Comprehensibly, the entire proposed rule could prove onerous for several publicly traded companies. The inclusion of Scope III has been heavily criticized, given the SEC prioritized its “materiality” threshold for disclosures (see SEC Chair Gensler’s argument on materiality). On the above requirements, several energy companies have long had to disclose Scope I and certain Scope II emissions under EPA guidelines. Scope I and Scope II would prove difficult (yet not unforeseen) for all non-energy companies to begin calculating and for all companies to begin disclosing to shareholders. Furthermore, Scope III disclosures would be extremely difficult for numerous reasons, not the least of which is, there is no standard methodology proposed by the SEC for calculating the universe of Scope III disclosures. Thus, companies could spend millions on regulatory burn just for the SEC to tell them their methodology for calculating Scope III is incorrect.

Argument Background

Needless to say, various industries ranging across traditional financial services, energy, healthcare, transportation, and even traditional agriculture have expressed significant concerns about the proposal over the last two years. Last week’s House Financial Services Subcommittee on Oversight and Investigations hearing focused on the legal grounds for challenging the SEC’s authority to even propose Scope III requirements. (See the Chamber of Commerce’s letter stating “[h]owever, the SEC’s Proposed Rules, as currently crafted, exceed the SEC’s lawful authority and are vast and unprecedented in their scope, complexity, rigidity and prescriptive particularity.”)

Even certain Democrats in Gensler’s own party find the rule overly burdensome, such as Senator Jon Tester (D-MT).

The SEC has stated that its goal for this rule is to provide “consistent, comparable, and reliable – and therefore decision-useful – information to investors.” Ensuring that climate risk-related information is available to investors is core to the SEC’s statutory authority and a response to increasing investor demand for this information. Opponents argue that the SEC is overstepping its authority as Scope III disclosure would require publicly traded companies to obtain information from privately held companies, who are outside the SEC’s regulatory authority. Opponents also point to privacy and confidentiality concerns given the amount of data that may need to be disclosed. The SEC has faced notices of potential legal action should Scope III make it into the final rule but has also received pressure from left-wing and climate groups and some Democratic lawmakers to keep Scope III included.