SEC’s Proposed Rules and the Supply Chain
John Lambo - Apr 22 2022Tracing indirect emissions to supply chain members may prove challenging
Last month, the U.S. Securities and Exchange Commission (SEC) released a comprehensive set of proposed rules to enhance and standardize a registrant’s climate-related disclosures in registration statements and annual reports for public companies (Proposed Rules) that are reasonably likely to have a material impact on its business. The Proposal is also meant to help investors assess climate-related risks.
At the recent Reuter's Responsible Business USA 2022 conference, S.E.C. Chair Gary Gensler noted that he views the Proposed Rules as keeping with the agency's mission and history of requiring information and risk disclosure to securities investors to enable them to make informed decisions.
The Proposed Rules aim to enhance and standardize disclosures so that a registrant may more effectively and efficiently disclose climate-related risks that may have material impacts on the registrant’s business or financial results.
A challenging component of the SEC rule on climate disclosure will be how the eventual regulation handles indirect emissions traced back to individual supply chain members (Scope 3 emissions). Scope 3 emissions are often a company’s most significant contribution to global warming.
During the agency’s information-gathering period, companies voiced concerns that they could face lawsuits over emissions outside of their direct control.
However, under the proposal, registrants would only have to report Scope 3 emissions if they are material or companies have set reduction goals that include Scope 3. The proposal contains a broad safe harbor from liability for Scope 3 emissions disclosure and an exemption for smaller issuers.
Yet, aware of the fact that Scope 3 emissions are particularly important to investors, “the SEC made a concerted effort to support its rationale for requiring Scope 3 disclosures, mentioning ‘Scope 3’ over 400 times" in the proposal while also acknowledging the "unique challenges associated with their measurement,” said Cynthia Mabry, a partner, and co-head of the ESG practice at Akin Gump Strauss Hauer & Feld LLP, in an interview.
Howard Fischer, a partner in the securities litigation practice at Moses & Singer LLP and a former senior trial counsel at the SEC, said the proposed rule’s provisions on Scope 3 reporting may ensnare third-party non-public companies that work with public companies.
“While non-public companies do not have to make their own climate-related disclosures, economic pressure to sustain their business relationships will likely require them to do so,” Fischer said. “Thus, the practical effect of requiring some filers to include Scope 3 disclosures — relating to the emissions of their suppliers, downstream users, and similarly placed parties — will be to bring many otherwise non-public entities into the SEC disclosure framework.”
Impact on Private Companies
With the expansive nature of Scope 3 emissions reporting, registrants would need to collect and report on emissions from their suppliers and customers, including private companies. The availability of this information and the relative impact on the reporting company’s carbon disclosures may influence purchasing and selling decisions.
It is also possible that the SEC could propose additional rules that will create a climate reporting framework applicable to some private companies.
What’s Next and What to Do
Even though it is uncertain to what extent the SEC’s proposed rules may be adopted as proposed or otherwise become effective, many public and private companies have begun reporting or are preparing for potential reporting on some level regarding sustainability.
“Aires has been tracking sustainability efforts since 2007 and reducing emissions by 3% annually,“ says Laura May Carmack, Quality Manager at the relocation management company.
Aires has extended its success to its clients through the Aires Carbon Offset Program. The program calculates the carbon impact of a client’s mobility program, i.e., household goods, relocation travel, and temporary housing. The total carbon impact is then converted to the number of carbon offsets. The client can choose how the offset funds are invested, i.e., renewable energy, protecting our oceans, animals and biodiversity, clean air, and reforestation.
Based on the newly released Worldwide ERC® Survey of nearly 900 Chief Human Resource Officers, nearly all participants (90.5%) possess a sustainability strategy approved by top leadership. The majority of respondents said their leadership had committed sufficient resources and funding to support the organization’s efforts.
According to respondents, the Worldwide ERC Survey also found that business leaders are looking to suppliers and business partners as their primary tactics to meet their sustainability goals. Fifty-six percent (56%) of organizations are looking to partners and suppliers to document specific sustainability criteria that will redound to their credit. Respondents rated this strategy of collaborating with the supplier network as the third-highest priority on average, following only digitalization and adopting public policy positions.
One of the most common strategies to influence their vendors’ operational and supply chain practices is to request information from them on their sustainability practices as part of the bid solicitation. While these requests go by many different names (survey, scorecard, checklist, or questionnaire), their purpose is to encourage vendors to improve their sustainability performance by asking them to disclose their efforts to reduce GHG emissions during the bid solicitation process. The questions asked by the organization may be the same for each solicitation, or they may be tailored to each bid to focus on where the largest sources of operational or supply chain impact are likely to occur within the contract.
Worldwide ERC’s Sustainability Advisory Council and Public Policy Forum are tracking disclosure developments and will determine what comments to submit to the SEC.
Worldwide ERC will also be providing additional educational materials and a session at the Spring Virtual Conference.
Please visit Forging the Future on Sustainability page on the Worldwide ERC website for additional information.