Institutional investors divided on SEC emissions reporting proposals
Some question the US regulator’s authority to demand disclosure, while others would like to see it go further
Proposals from the US Securities and Exchange Commission (SEC) to mandate public companies to report their carbon emissions have generated an avalanche of responses, including some strongly opposed and others pushing the SEC to increase its coverage.
The SEC plans to enforce companies to report Scope 1 (direct) and Scope 2 (indirect) emissions as well as Scope 3 emissions (from supply chains) under certain circumstances.
The Supreme Court decision is not good news for the SEC. People are extrapolating from it that the SEC is going to have some serious issues and will be challenged in court.
Legal challenges
The State Financial Officers Foundation (SFOF) opposes the SEC on grounds ranging from the disclosures being unnecessary to a pension fund’s fiduciary duty to enforcement potentially violating the First Amendment.
The SFOF response, signed by 23 US state financial officers, asserts that the SEC cannot obligate disclosures as that power lies with the Environmental Protection Agency (EPA).
However, even the EPA may not have the power following a Supreme Court decision blocking its ability to curb power plant emissions. The court stated that Congress had not given it the authority and this has implications for the SEC.
Farza Damania, a partner at US law firm Katten Muchin Rosenman, says: “Very distinguished professors are arguing this proposal is overreaching and not part of the SEC’s mandate.”
“The Supreme Court decision is not good news for the SEC. People are extrapolating from it that the SEC is going to have some serious issues and will be challenged in court.”
Expanding Scope 3
By contrast, the $315bn California State Teachers' Retirement System (CalSTRS) argues that the SEC should tackle Scope 3 more rigorously than it has proposed.
CalSTRS suggests that the SEC should require Scope 3 disclosure for all public companies, instead of only those that reference them in targets or determine them to be financially material.
A CalSTRS spokesperson says: “The SEC is charged with ensuring fair, orderly, and efficient markets. Efficient markets rely on the widespread availability of information, and we believe climate-related information is crucial in properly assessing any investment.”
However, as Scope 3 data is often estimated or incomplete, there are doubts over its usefulness.
Adam Gillett, head of sustainable investment at Willis Towers Watson, says: “Some Scope 3 data is available, and there are estimation models for filling gaps. Regulation mandating more disclosure will clearly accelerate this.”
“On balance, for many investors, company-reported Scope 3 data as-is does not currently pass their quality and coverage threshold to confidently integrate into investment decisions.”
Gillett adds that investors already making allocations based on climate data could do so with more confidence when reliable Scope 3 data becomes available.
Producing Scope 3 data should not be too onerous for companies. Maia Becker, senior director for corporate governance and responsible investment at RBC Global Asset Management, notes that Europe is ahead of the US on ESG reporting standards.
“We recommend that all companies produce disclosures in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). These include the disclosure of a company’s Scope 1 and 2 emissions, as well as their material Scope 3 emissions,” she says.
“Consistent and comparable company disclosures are important for investors as we seek to integrate material climate-related risks and opportunities into our investment process.”
The validity of Scope 3 emissions was questioned by the SFOF, which argues that not all firms are even required to report Scope 1 and 2, so affected companies may struggle to calculate their supply chain emissions.
Industry-specific issues
The materiality of Scope 3 emissions is greater in some industries, particularly for oil and gas.
David Walls, a vice president within the energy practice at US consultancy Charles River Associates, says: “It is important for energy companies to start to characterise and track their emissions.”
“The first step is understanding the full range of their emissions so they can calculate and report on them in a way that's consistent across the industry. Now, in the US, there are no clear requirements that ensure this consistency of reporting.”
Research by sustainability tech platform Clarity AI shows 66% of the companies that report emissions data to CDP, a global voluntary disclosure project, have reduction targets in place. However, just 21% have targets that include Scope 3 emissions
Patricia Pina, head of research and innovation at Clarity AI, says: “As the shift towards low-carbon development pathways becomes an even stronger imperative, Scope 3 emissions can no longer be ignored. The integration of Scope 3 allows for better monitoring of pathways to decarbonisation.”
