Scope 3 Emissions in SEC Climate Rule: Retention or Removal?

When the Securities and Exchange Commission (SEC) unveiled its climate disclosure proposal in March 2022, mandating that companies detail their greenhouse gas emissions levels and climate risk reduction strategies on Form 10-K, the announcement drew sharp criticism from certain Republican lawmakers, industry groups, and dozens of state attorneys general.

The central point of contention: a proposed requirement for companies to disclose scope 3 emissions — indirect emissions originating not from the company's own operations or owned assets, but from entities within its value or supply chain, as defined by the Environmental Protection Agency. Although corporations do not directly generate these emissions, scope 3 often constitutes the largest share of their total greenhouse gas footprint.

Since the proposal's release, the SEC has received more than 16,000 public comments, prompting repeated postponements of the final rule. Most recently, the agency missed an anticipated October release while reviewing feedback. Last month, the SEC indicated it plans to finalize the long-awaited rule in April 2024, though it offered no details on whether scope 3 requirements would be amended or dropped.

Why Scope 3 Draws Fire

The original proposal required scope 3 disclosure "if material or if the registrant has set a GHG emissions target or goal that includes scope 3 emissions." The SEC argued such disclosures would help investors assess a company's "exposure to, and management of, climate-related risks, and in particular transition risks," while exempting smaller reporting companies.

The proposal aligns with existing global frameworks, including the European Union's Corporate Sustainability Reporting Directive, which imposes more extensive scope 3 requirements, and California's disclosure laws, which also mandate scope 3 reporting. Nevertheless, critics argue the mandate places an onerous burden on businesses, demands disclosures immaterial to investor decisions, and stretches the SEC's authority beyond its congressional mandate.

In June 2021, organizations including Western Energy Alliance and the U.S. Oil & Gas Association wrote to SEC Chair Gary Gensler, questioning whether the agency had a congressional mandate to "regulate in the sphere of climate disclosure at all" and warning of consequences if it sought to "aggressively regulate in this space." The letter argued: "With disclosure and ESG reporting in their infancy compared to well-established financial disclosures, it is better for competing systems to continue to evolve before the federal government imposes a bureaucratic straitjacket."

Texas Attorney General Ken Paxton echoed this in a June 2022 letter co-signed by 12 other attorneys general. Paxton called the rule "flawed," particularly regarding scope 3, asserting the requirements would "not produce consistent and reliable information for investors." He noted that scope 3 reporting forces companies to "gather information from a vast array of sources, including data on the transportation, distribution, processing, use, and end-of-life treatment of a [company's] goods," with potentially low data accuracy. "The reliability of Scope 3 GHG emissions reporting is also doubtful, which makes inclusion of statements about Scope 3 potentially harmful to the very investors whom the SEC is supposed to protect," Paxton wrote.

In response to such feedback, the SEC said it was aiming to avoid exceeding its authority as it finalizes the rule. Gensler told the U.S. Chamber of Commerce in October: "We did get a lot of feedback on that — that those estimates might then lead to the companies asking the supply chain for forms and numbers and everything like that. So that's why staff is looking through as to how we can ensure that we don't indirectly sort of do what we can't do directly — we don't regulate nonpublic companies."

What Happens Next: The Fate of Scope 3

While some companies oppose any formal climate disclosure mandate, many view the SEC's proposal as consistent with existing rules in the EU and U.S., particularly California's Senate Bills 253 and 261.

"For eBay, we don't have any qualms or problems disclosing our emissions because we have been," Renee Morin, eBay's Chief Sustainability Officer, told ESG Dive. "I think it's really going to be more about the fact that there are multiple lines of work, both globally and here in the U.S."

Morin noted that eBay — along with Amazon, Facebook, Salesforce, and Intel, which already voluntarily disclose climate data — provided the SEC with input on practical challenges, especially around scope 3 reporting. In their June 2021 letter, the companies stated: "Given that climate disclosures rely on estimates and assumptions that involve inherent uncertainty, it is important not to subject companies to undue liability, including from private parties. Also, reporting deadlines should allow sufficient time for companies to gather and validate information obtained from third-party providers."

The prolonged rulemaking process has left many uncertain about scope 3's inclusion. "I would say at the moment, it's uncertain whether the reporting of indirect emissions by a company's suppliers, what you would describe as scope 3, will be included [in the final rule]," Mark Stach, chief services officer at Sphera — an ESG performance and risk management software, data, and consulting services provider — told ESG Dive. "I don't think that's a certainty as of yet."

Erin Martin, a partner at ESG and sustainability advisory firm Morgan Lewis, echoed Stach's assessment, telling ESG Dive that the general expert consensus is scope 3 is "likely on the chopping block." Martin, who spent over a decade in the SEC's Division of Corporation Finance, said scope 3 remains "one of the significant areas of concern [regarding] the ability to actually implement the necessary policies and procedures to provide that type of disclosure." She also cited the lack of adequate external infrastructure to record and supply high-quality value chain data.

However, Martin cautioned that removing scope 3 would not necessarily shield the rule from legal challenges. "Even if scope 3 is no longer in the final rulemaking … I do think that there's still going to be significant pushback about scope 1 and scope 2 as well," she said.