Democrats press SEC for scope 3 in climate disclosure rule

Democratic lawmakers have written to the US Securities and Exchange Commission (SEC) expressing support for “finalising a strong climate disclosure rule without delay”, and that scope 3 emissions must form part of that rule.

In the letter to chair Gary Gensler, the senators and representatives explained that “climate risk disclosure is key to the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation”.

The letter comes as reports indicate that the agency may be considering softening the rule by increasing certain disclosure thresholds for reporting and reducing the content of scope 3 emissions disclosures. The legislators call these reports “deeply concerning”.

In the letter, the legislators express the need for the SEC’s final climate disclosure rule to include comprehensive scope 3 disclosures. “Not requiring scope 3 emissions disclosures would enable [fossil fuel] and other companies with similar types of emissions patterns to hide the vast majority of their exposure to climate risk from regulators and investors”, they wrote. “For many companies and sectors, a greenhouse gas inventory that omits scope 3 would be materially misleading to investors.”

Further, they noted that, were the SEC to drop scope 3 disclosures from the final rule, “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”. They argue this would make US capital markets less fair and investors less protected.

The SEC released its proposed rule for public comment in March 2022. If finalised as proposed, the rule would require corporate issuers of publicly-traded securities such as stocks and bonds to disclose the risks and opportunities they face from climate change. They would also need to show how climate change and climate-exacerbated weather events have affected their operation, and their greenhouse gas emissions under scopes 1, 2 and 3.

A regulatory filing indicates that the SEC intends to finalise the rule in the second quarter of this year, though that deadline is not legally binding.

Business organisations have threatened the SEC with litigation if they finalise the rule as it currently stands. Litigation could challenge the finalised rule from two angles. First, litigants could argue that the SEC did not adequately consider the economic impacts of its rule and did not require the most effective means of achieving its aims.

Second, the SEC could be challenged on the grounds that it does not have the legal authority to write particular climate-related disclosure regulations, especially those related to emissions disclosures. Before it finalises the rule, the SEC can make changes to address the first type of challenge, but cannot address the second.

The threat of litigation and the demands of Democratic party insiders has put the SEC – and particularly Gensler – in a difficult position. If the agency includes scope 3 disclosures in the final rule, it will undoubtedly face litigation with the heightened possibility that a court will declare the entire rule invalid. However, if the agency removes scope 3 disclosures from its final rule, the Democratic party’s base will be disappointed, potentially affecting the political prospects of the SEC’s Democratic members.

The SEC is a five-member body, currently constituted with three Democrats and two Republicans.