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SEC should mandate Scope 3 disclosures, says environmental group

By Seth O'Farrell
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Research by non-profit Ceres found that the majority of institutional investors support the disclosure of Scope 3 emissions. (Photo: AZ-BLT/Envato)

The Sierra Club has submitted additional comments stressing the need for supply chain emission disclosures ahead of the US regulator’s climate risk disclosure rule, expected to be released in the coming months.

In a letter to the US Securities and Exchange Commission, environmental campaign group Sierra Club has highlighted academic research conducted by Madison Condon, associate professor at Boston University’s School of Law, as it turned up the volume on its call for Scope 3 emission disclosures.

“Professor Condon makes a compelling case for including a robust Scope 3 disclosure requirement in the climate risk disclosure rule,” the letter read.

One key argument cited in the research is that “because the division between Scopes 1, 2, and 3 follow the arbitrariness of firm boundaries, certain channels of transition risk — and reputational risk — are not eliminated by simply outsourcing a high-risk process to a third party”.

“A blinkered focus on Scopes 1 and 2 misses these exposures,” the research stated. 

Last year, the SEC proposed rule changes that would require companies to report their Scope 1 and 2 emissions in their climate risk disclosures. However, it proposed that Scope 3 emissions would only be mandatory if these were financially “material” to the company or if the company had integrated Scope 3 into its emissions targets.

Sierra Club consultant John Kostyack told Sustainable Views that the question of Scope 3 emissions looks to be the “hot debate” over the SEC’s rule.

“There is resistance to Scope 3, and until we see the final rule it could be up in the air for a while,” he said. “Sierra Club members who are investors and would like to see these emissions disclosures … are also concerned about the overall systemic risk of growing emissions.” 

According to analysis by environmental, social and governance research group Ceres, 97 per cent of a selection of more than 300 institutional investors, which collectively own or manage more than $50tn in assets, support the disclosure of Scope 3 emissions.

Concerns if Scope 3 disclosures are excluded

The Sierra Club stressed that multiple use cases for Scope 3 emissions disclosures have emerged and are increasingly relied upon by investors and other market participants. These include performance by executives whose compensation is tied to emissions reductions, and progress on emissions reductions among companies in the portfolios of fund managers with so-called “climate-aligned” offerings. 

The group said: “Investors and academic experts are concerned that outsourcing of Scope 1 emissions will increase if Scope 3 emissions are excluded from a mandatory reporting regime.” 

In its previous letter issued to the SEC, the Sierra Club warned: “If the SEC enacts a less rigorous disclosure regime, it may well stand alone behind the many other jurisdictions that will swiftly codify the global baseline standards issued by the International Sustainability Standards Board. 

“Consequently, the US capital markets will be less fair, and US investors less protected, [because of] the SEC’s failure to modernise with the rest of the world.”

As investors look to harmonisation across climate risk disclosures, there is a stronger case still for the SEC to include Scope 3 emissions.

“If the SEC fails to [make Scope 3 emissions mandatory without exceptions], it will be out of alignment with other regulators and it would be very costly for investors to have a completely different legal framework in the US and elsewhere,” Kostyack said.

A service from the Financial Times