Companies Required to Disclose ESG Under Proposed Rules

The SEC seeks to mandate that publicly traded firms show how they are easing their carbon footprint.

March 23, 2022

ESG Web of Connection

ALEXANDRIA, Va.—The Securities and Exchange Commission (SEC) in a 3-1 vote proposed rules that would require publicly traded companies to disclose their environmental, social and corporate governance (ESG) plans, reports the Hill.

The proposed rules state that companies traded on the stock market must show to investors how certain climate-related risks can affect their finances. Risks could include the increase in severe weather, potential costs of shifting away from fossil fuels and how a company is attempting to limit its carbon footprint.

Some companies also will need to disclose their emissions, which includes data from their suppliers and customers, reports the Wall Street Journal.

The data included in companies’ emissions reports won’t necessarily be on a like-for-like basis, according to the proposed rules, and only some of the data will have to be verified independently.

“The landmark SEC proposals add a dense layer of climate reporting requirements to the existing bedrock of mandatory financial disclosures,” writes the Journal.

All publicly traded companies would have to disclose the emissions that are created by their operations plus their energy use, which the SEC calls Scope 1 and Scope 2. Scope 3 would apply to some large companies and would require disclosure of the carbon created by their supply chain and customers. The SEC does allow Scope 3 emissions to be determined by the company, as long as they show their methodology.

Scope 3 emissions can be hard for companies to measure accurately or to control, according to some business groups and academics.

“The quality, provenance, methodologies and content of Scope 3 reporting leave a lot to be desired among even sophisticated companies, even in advanced economies such as in the U.S.,” Anant Sundaram, a finance professor at Dartmouth College’s Tuck School of Business, told the Journal.

Companies cannot be sued for inaccurate Scope 3 disclosures under the SEC proposed rules, as long as the information is reasonable and given in good faith. Scope 3 rules also will not be audited. However, Scope 1 and Scope 2 data provided by large companies will need to be independently verified.

Kristina Wyatt, a former SEC official, told the Journal that the proposals would make it easier for investors to compare companies’ carbon footprints, even if different methodologies are used. “Maybe it’s not entirely perfect, but it’s certainly a huge leap forward from where we are right now,” Wyatt, deputy general counsel at Persefoni Inc., a carbon-accounting startup, told the Journal.

Anyone can make comments on the proposed rules are open for 60 days before the SEC is allowed to finalize and enforce them, which could take several weeks or months.

A recent Convenience Matters podcast episode and NACS Magazine article explored how ESG is affecting the convenience retailing industry.