By LSN Partners on October 28, 2022

In the most hotly debated piece of Chairman Gary Gensler’s push to force more climate-related disclosures from listed companies, the Security and Exchange Commission (SEC) is considering dropping a controversial provision on carbon emissions from its much-anticipated rule on corporate climate disclosures.

In March 2022, the SEC released a proposed rule change requiring mandatory climate disclosures in business registration statements and periodic reports. The necessary information in the mandatory disclosures is wide-ranging, from climate-related risks that are likely to have a material impact on business to the direct and indirect (Scope 1 and 2) greenhouse gas (GHG) emissions generated by a business.

The controversial provision would require public companies to disclose GHG emissions from their entire supply chains and loan portfolios. These are known as “Scope 3” emissions because they go a step beyond GHG generated by a corporation’s core operations.

Progressives say the measure is key to confronting climate change and have been pushing Gensler to retain the requirement. However, business leaders say the Scope 3 disclosures rely on significant estimation and approximation, are cost prohibitive, and would have minimal impact on combating climate change.

The Scope 3 rule will likely be challenged in federal court, where recent decisions make the SEC’s outlook less predictable. Earlier this year, the Supreme Court ruled in West Virginia vs. EPA that the federal agency overstepped its Congressional mandate to regulate certain types of emissions. This landmark decision opened the door for additional challenges that contest other federal agencies’ abilities to enforce regulations without explicit Congressional authorization. As a result, there is concern that a legal challenge to the Scope 3 rule could ultimately lead to a court ruling restricting the SEC’s ability to regulate disclosures beyond requiring basic financial information.

In contrast, Britain became the first G20 country to require companies to disclose their climate-related risks to investors earlier this year. The U.K. regulations are not as detailed as the SEC’s, but investors seem to have accepted them without much fallout.

Stuck between progressive fervor and conservative opposition, the SEC may try to find a middle ground on Scope 3 disclosures. This could mean limiting the disclosures to companies in specific industries, similar to the rule requiring mining companies to certify their minerals don’t come from countries that use those products to finance conflicts. Annually, roughly 1,000 companies file mineral disclosures; this equates to approximately 25% of the listed U.S. companies.

The SEC will likely deliver a decision on the entire proposed rule after the midterms following a public-comment period that ends November 1st.

We will continue to keep you informed.