The increased push for the whole of government approach to address anthropogenic greenhouse gas (GHG) emissions is growing. Opposition to the all-inclusive approach to reporting is growing as well.
The (SEC) Enhancement and Standardization of Climate-Related Disclosures for Investors
One of the controversial climate-related reporting requirements comes from the Security and Exchange Commission (SEC). The SEC’s proposed environmental disclosure is significant and has drawn a lot of attention.
SEC Chair, Gary Gensler, stated of the March 2022 proposed rule, “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
One of the SEC’s Commissioners has stated, in no uncertain terms, their strong opposition to this proposed rule (discussed later).
The disclosures include Scope 1 and Scope 2 GHG emissions (from the company’s owned or controlled operations and purchased or acquired energy). Where much of the current controversy arises is from Scope 3 GHG emissions.
Scope 3 Emissions
Scope 3 Emissions include purchased goods and services, transportation and distribution, business travel, and employee commuting. These emissions can conceivable touch everyone providing services to a reporting company. The Environmental Protection Agency (EPA), states, “The scope 3 inventory provides a quantitative tool for companies to identify and prioritize emissions-reduction opportunities along their value chain.”
Scope 3 Complexities
Several companies have stated their opposition to Scope 3 Emissions, including Walmart. They state that Scope 3 reporting is currently unreliable. They also state that Scope 3 Emissions are difficult to measure given they depend on data inputs from tens of thousands of suppliers (Wall Street Journal, April 25, 2023).
With respect to the complexity, Walmart provides this example on their website: “The emissions footprint of a single t-shirt, for example, depends on the agricultural practices in the cotton field that produced the yarn, the energy used in the mill that spun the fabric and the garment factory that sewed it, the fuel sources and efficiency of the trucks at each stage of transportation, and the choices a customer made regarding how to wash and dry the item.”
The proposed climate-related reporting requirements by the SEC has drawn criticism (Image by Sergei Tokmakov, Esq. from Pixabay).
SEC Commissioner Treatise Opposing SEC Proposal
SEC Commissioner, Hester Peirce, in a lengthy treatise titled “We are Not the Securities and Environmental Commission – At Least Not Yet,” stated her strong opposition. Below are a few quotes from her statement.
“We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency. For that reason, I cannot support the proposal.”
“It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.”
“This proposal exceeds the Commission’s statutory limits. Congress gave us an important mission — protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets — and granted us sufficient regulatory authority to achieve that mission.”
“Professor Sean Griffith contends that First Amendment jurisprudence suggests that the SEC cannot compel disclosures of the type proposed today.”
“It is important to remember…that noble intentions, once baked into complex regulatory plans, often have ignoble results. This risk is considerably heightened when the regulatory complexity is designed to push capital allocation toward politically and socially favored ends, and when the regulators designing the framework have no expertise in capital allocation, political and social insight, or the science used to justify these favored ends. This proposal, developed under these circumstances, will hurt investors, the economy, and this agency.”
“We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in magnitude and cost and probably outpace it in complexity. The building project upon which we are embarking will consume our attention and enrich many, as any massive building project does. The placard at the door of this hulking green structure will trumpet our revised mission: ‘protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.’ This new edifice will cast a long shadow on investors, the economy, and this agency. Accordingly, I will vote no on laying the cornerstone.”
Attorney Generals’ Opposition
Attorney Generals of 24 states have argued that the SEC’s rule would be barred by a US Supreme Court decision that found congressional approval is needed for a major shift in agency policy. In a letter to the SEC during the comment period, they stated, “We urge you to save everyone years of strife by abandoning the proposed rule.” (Source: Wall Street Journal, April 23, 2023).
Status of Proposed Rule
Reports vary with respect to the status of the proposed rule. In February 2023, Politico reported that, “…Gensler’s lingering legal concerns about the draft scope 3 requirements indicate that the SEC — nearly a year after proposing the rule — is still grappling with what to do about one of the most aggressive parts of the plan.”
If implemented, this will significantly add to the growing environmental regulatory environment that has focused on climate, Environment/Social/Governance (ESG), Environmental Justice (EJ), and the ever-expanding proposed regulations involving per- and polyfluoroalkyl substances (PFAS). This, in addition to the already significant and complex “routine” obligations under federal and state environmental statutes, may become overwhelming both administratively and financially for many companies. We will continue to monitor all of this and see where it settles.
If you need assistance on an environmental issue (permitting, planning, assessments, closures, litigation support, etc…), contact Jeffrey Bolin, M.S. at 248-932-0228, Ext. 125.
This blog was drafted by Alan Hahn. Alan has an undergraduate degree in Environmental Studies and completed a graduate program in Environmental Management. He has worked in environmental management for 45 years. He has written hundreds of blogs and articles. His published work includes Michigan Lawyers Weekly, Detroiter, Michigan Forward, GreenStone Partners, Manure Manager Magazine, Progressive Dairy, and HazMat Magazine.
The blog was reviewed by Jeffrey Bolin, M.S. Jeff is a partner and senior scientist at Dragun Corporation. He is a published author, frequent speaker, and expert witness. His expertise in environmental due diligence, PFAS, vapor intrusion, and site assessments has led to projects in the US, Canada, and overseas. See Jeff’s Bio.
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