The Securities and Exchange Commission (SEC) is about to scrap the requirement for Scope-3 reporting. In doing so, the US stock market watchdog is driving a wedge between US legislation and the new European rules from the Corporate Sustainability Reporting Directive, or CSRD that will apply from next year.
Reporting requirements for Scope 3 emissions are likely to be removed from the SEC's final climate reporting guidelines, which could be decided on Wednesday. Pressure from politics and business has presumably become too great, Reuters news agency reported on the basis of anonymous sources.
Listed companies would no longer be required to report on greenhouse gas emissions in the supply chain, including those of private companies selling to listed companies, and from the end consumer. According to research by Deloitte and Morningstar Sustainalytics, Scope 3 emissions account for roughly two-thirds of companies' carbon footprints.
Entire value chain
Scope 3 emissions are indirect greenhouse gas emissions resulting from a company's entire value chain. This includes resource extraction, manufacturing, distribution, product use and waste disposal. Investors attach importance to this because it shows the comprehensive environmental impact of a company, which affects long-term sustainability and viability.
The SEC's relaxation would be a significant departure from European Union rules that make Scope 3 mandatory from next year for large and medium-sized EU-based companies and non-EU companies with significant operations in the union, such as many US listed companies.
Legal Achilles' heel
Making Scope 3 reporting mandatory is proving to be a legal Achilles' heel in the US. A major shortcoming for the SEC is that regulation of private companies in the US is a task for individual states. Unlike the EU, which has the power to regulate both public and private companies of all sizes, the SEC only has the power to regulate listed companies.
This is a legal problem when it comes to Scope 3 reporting, as it requires listed companies to collect information from private companies. This creates indirect regulation of private companies, which are outside the SEC's regulatory jurisdiction.
Although SEC chairman Gary Gensler has repeatedly claimed that the SEC has that authority, chances are that a court will have the final say on this. However, the US Supreme Court has a strict reading of the powers of administrative agencies such as the SEC.
Incidentally, it is no secret that SEC chairman Gary Gensler acknowledges the controversial nature of Scope 3 reporting, and has hinted at possible changes to address industry concerns. Gensler said in October at a US Chamber of Commerce event that he hoped the emissions disclosure rules - to which came the now famous 16,000 responses from the market - would survive any legal challenges once finalised and adopted.
By dropping scope-3 requirements, the new rules are likely to be more resilient to the inevitable litigation. Meanwhile, the SEC refrains from confirming the exact timing of the release of the final regulations.
Further reading on Investment Officer Luxembourg:
- Why investors can’t afford to ignore Scope 4 emissions data
- CSRD: Industry left ‘to pick up ESG data pieces,’ says Efama
- EU agrees new CSRD rules to stop green-washing
