Energy Transition – An evolving journey

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Read time: 6 minutes

On March 21, 2022, the U.S. Securities Exchange Commission (SEC) released a proposed rulemaking package to require climate-related disclosures. One such requirement relates to Scope 3 emissions.

The SEC recognizes three categories of emissions: (1) Scope 1 emissions, which are direct emissions from sources owned or controlled by a company, (2) Scope 2 emissions, which are emissions primarily resulting from the generation of electricity consumed by a company, and (3) Scope 3 emissions, which refer to “all other indirect emissions not accounted for in Scope 2 emissions,” meaning emissions from sources outside a company’s control. Companies are typically able to calculate Scope 1 and 2 emissions without much difficulty; however, estimating Scope 3 emissions presents challenges, as Scope 3 emissions occur from other processes and entities outside the company’s control that serve the company’s value chain.

Reporting under the proposed rule

For registrants that do not qualify as a smaller reporting company (SRC), the proposed rule will require disclosure of Scope 3 emissions and their intensity if they are “material” or the registrant set a GHG emissions reduction goal that includes Scope 3 emissions. Thus, the proposed rule does not require reporting of all Scope 3 emissions. A company’s reporting obligation would depend on a number of specific factors, which you can read more about in our blog post.

Scope 3 calculation methodology

Although the proposed rule adopts many features of the GHG Protocol, a key difference between the two is the proposed rule’s leniency on how companies calculate GHG emissions, which includes Scope 3 emissions. The proposed rule indicates that this deviation is an opportunity for companies to choose the methodology that best suits their portfolio and financing activities.

Safe harbors

While the proposed rule introduces sweeping changes to climate-related disclosures, it also includes key provisions aimed at lessening compliance burdens, including the exemption for SRCs, discussed above, a delayed compliance start date for Scope 3 emissions reporting, and a safe harbor provision that insulates a company from certain securities law liabilities for Scope 3 emissions disclosures.

The proposal includes a safe harbor provision related to liability for Scope 3 emissions that were disclosed under the proposed rule in a document filed with the SEC. This limitation on liability would deem a Scope 3 disclosure to not be fraudulent unless it was made or reaffirmed without a reasonable basis or disclosed other than in good faith.

Key takeaways
  • Proposed rule targets Scope 3 emissions
  • The SEC's final rule will probably face challenges under the APA
  • U.S. federal agencies are addressing concerns over GHG emissions and climate change