On June 17, the Securities Exchange Commission (SEC) is due to receive comments from companies and interested parties in response to the SEC proposed Climate Risk Disclosure Rule. The proposed rule is well-intentioned, but to say the least, very controversial. As comments are received, the SEC will be charged with absorbing a wide range of perspectives, including concerns, but also suggestions for improvement.
By way of background, on March 21, 2022, the SEC proposed a rule that would require registrants to report climate-related disclosures in their filings, including information about climate-related risks that might have a material impact on their business operations and financial results as a part of audited financial statements. The information about climate-related risks also would include disclosure of greenhouse gas emissions, referred to as “Scope” emissions. Those include direct greenhouse gas (GHG) emissions (Scope 1), and indirect emissions from purchased forms of energy (Scope 2). Most controversial, however, is a requirement to disclose GHG emissions from upstream and downstream activities within its business operations value chain (Scope 3).
By definition, Scope 3 emissions include those resulting from activities or assets not directly controlled or owned by the registrant, but they are part of the upstream (suppliers) and downstream (clients) value chain of the company. The SEC proposal would require so called large accelerated filers to report these emissions if they are material, or if the company has an emissions reduction target that includes Scope 3 emissions. To do that they must have access to reliable data from those in their value chain, and in many cases that data would come from small and medium size businesses. Those businesses simply do not have access to the resources needed to compile the type of emissions data that will be required under the rule.
Having spent a good part of my career focused on both big and small business operations including work in support of both product and business format franchising and related legislative advocacy, I have learned how these businesses work, and most importantly, communicated how they weave their supply chains to efficiently and reliably provide goods and services that are absolutely critical to the economic health and growth of the U.S. economy. Throughout the last two years I have closely followed the impact of the Covid pandemic on these businesses. Working closely with the Small Business and Entrepreneurship Council and also the Society of Independent Gasoline Marketers of America who have both provided remarkable support and advocacy for business owners, I have witnessed the collective resilience that is responsible for keeping our commerce and country functioning under some of the most severe operational and financial constraints we have witnessed in decades.
It is with this understanding that as the SEC advances its review of the comments and determines final rules, it must understand that the small and mid-size businesses which drive 70% of U.S. job creation and economic growth, now face of an epic wave of inflation and continuing labor and supply chain challenges. These challenges will not abate soon, and they will add significant costs to an already heavy slate of operational burdens. In fact, in many cases the new SEC proposed rules requirements would be redundant to those that many companies already provide via widely accepted disclosure regulations.
No one denies the need to meet climate objectives, provide appropriate transparency with respect to GHG emissions, and achieve established net-zero 2050 goals. While Scope 1 and 2 reporting should be achievable for many issuers, providing Scope 3 data in response to an SEC rule is going to be expensive to all companies in the value chain. Furthermore, the SEC’s proposed approach to Scope 3 reporting would undermine and confuse existing materiality standards and impose tremendous operational burdens on businesses of all sizes, especially many of those small businesses currently exempt from reporting requirements.
Simply put, a Scope 3 mandate within the SEC proposed rule, is not needed. It will be burdensome and expensive, and it will cripple many small businesses at a time when we need them, more than ever, to stay focused on their primary mission to provide their products and services, while they contribute to U.S. economic job creation and growth. Scope 3 reports will be confusing to investors and do little to inform their investment decisions. Finally, Scope 3 reporting is not material given Scope 1 &2 data which is already available. The SEC must reflect on comments they receive and rescind the Scope 3 reporting requirement from their final rule.
Michael J. Roman
Senior Fellow Public Policy / ESG
American Council for Capital Formation
President, CertainPoint Strategies, L.L.C.