SEC adopts climate disclosure rule, drops Scope 3 requirements: What are the implications?
On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) voted to adopt their climate disclosure rule. Prior to this, on February 22, Reuters reported that the SEC had dropped certain requirements from its climate disclosure proposal, including Scope 3 emissions. With the finalization of the rule on March 6, those reports were confirmed correct. Scope 3 emissions are a notable exception from their final climate risk disclosure rule. According to an SEC spokesperson, “…the agency considered adjustments to its draft rules based on public feedback…”
The issue of Scope 3 carbon emissions requirements is contentious, with its critics citing the mandate as burdensome and immaterial to investor decisions. Those in opposition also argue that Scope 3 reporting is unreliable to the extent that it will not produce consistent information.
It’s true that when calculating your organization’s greenhouse gas (GHG) emissions, Scope 3 is by far the most difficult to compute, but they also account for an overwhelming majority of corporate emissions.
And despite the SEC’s final rule, other jurisdictions already require reporting of these emissions. The Corporate Sustainability Reporting Directive (CSRD), which took effect at the end of 2022, applies to organizations within the EU and certain organizations doing business within its borders, and the Climate Corporate Data Accountability Act was signed into California law in October 2023. Both rules require more stringent disclosures of Scope 3 GHG emissions than the SEC proposal ever did.
What are Scope 3 emissions?
Let’s clarify what Scope 3 emissions entail to best understand the debate. The Greenhouse Gas Protocol defines three scopes of emissions:
- Scope 1: Direct emissions from owned or controlled sources (e.g., combustion of fossil fuels).
- Scope 2: Indirect emissions from purchased electricity, heat, or steam.
- Scope 3: Indirect emissions from activities outside a company’s direct control, including supply chains, product use and disposal.
Scope 3 emissions are both significant (often accounting for 65% to 95% of a company’s carbon impact) and indirect — resulting from activities beyond a company’s immediate operations. These emissions are notoriously challenging to estimate, track and report due to their complex nature, leading many organizations to invest in carbon accounting software to automate this process. Still, there are a number of reasons why your organization should continue with its plans to report on Scope 3.
4 reasons Scope 3 emissions continue to be a business imperative
Regardless of the amendments to the SEC ruling, quantifying the totality of your organization’s emissions is essential to understanding the full environmental impact of doing business. By leaving Scope 3 emissions out of your reporting, you may be leaving significant opportunities for improvement on the table.
1. Risk mitigation
Proper reporting of Scope 1, 2 and 3 emissions will enhance decision-making and provide a solid foundation for better oversight and risk management. Companies that report on Scope 3 emissions strengthen their supply chain resilience. Understanding emissions associated with suppliers, raw materials, and logistics allows for targeted risk mitigation strategies. By identifying high-emission suppliers or vulnerable points in the value chain, companies can take proactive measures to reduce their overall carbon footprint.
2. Strengthening stakeholder trust
Transparency is key in today’s business landscape. Investors, customers and other stakeholders increasingly demand comprehensive information on environmental performance. Companies that voluntarily disclose Scope 3 emissions demonstrate commitment to sustainability and build trust. Such transparency fosters stronger stakeholder relationships, ultimately benefiting the bottom line.
3. Innovating and creating a competitive advantage
Addressing Scope 3 emissions drives innovation. Companies that actively manage their indirect environmental impact often discover new ways to optimize processes, reduce waste and develop sustainable products. These innovations can lead to cost savings, new revenue streams, and a competitive edge in a rapidly evolving market.
Competitors are always waiting to gain an advantage. In the long term, it isn’t easy to imagine how organizations that do not take steps to reduce their GHG emissions will remain financially viable against those who are taking it seriously now.
4. Aligning with global climate goals and standards
Regardless of the SEC ruling, other regulations like the CSRD and California’s newly enacted climate laws already require comprehensive reporting of Scope 3 emissions, which many organizations are compelled to comply with. And the trends are only pointing in one direction: toward more requirements in the future.
Reporting on Scope 3 emissions aligns with international climate goals, such as the Paris Agreement. Moreover, companies that voluntarily disclose these emissions contribute to collective efforts to limit global warming and transition toward a low-carbon economy.
Moving forward with Scope 3 emissions reporting
While the SEC’s potential exclusion of Scope 3 emissions from mandatory disclosures may create short-term relief for some companies, responsible organizations recognize the long-term implications and have already begun to establish systems for maintaining auditable records of Scope 1, 2 and 3 emissions.
The time is now. Investor expectations are only increasing as it relates to transparency, and the more they receive from other organizations, the thicker and faster those expectations will become. That’s why it makes sense to invest in the right software now.
Technology like Carbon Accounting from Diligent can save time by automating data collection and reporting emissions across Scope 1, 2, and 3 for a clean, comprehensive view of your organization’s activities.
Always be auditable. Be ready to produce records that offer stakeholders 100% transparency with over 80 pre-built reports. At the same time, our in-house team can create the customizations your business requires so you can provide your executives and board members with easy-to-read dashboards that contain only the information that matters most to them.
The time is now to set the standard in your organization. Take the hassle out of Scope 3 emissions reporting with Carbon Accounting from Diligent.
