SEC Chair Gensler says ‘Scope 3’ emissions disclosures aren’t ‘well developed,’ hinting they could be scaled back in climate rule

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, testifies before the Senate Banking, Housing and Urban Affairs Committee during an oversight hearing on Capitol Hill in Washington, September 15, 2022.

Evelyn Hockstein | Reuters

WASHINGTON — Securities and Exchange Commission Chair Gary Gensler hinted again Monday that the agency was considering scaling back its emissions disclosure rule.

While Gensler said he didn’t want to “get ahead of the process” when asked about the possibility of discarding so-called Scope 3 disclosures, he acknowledged that far fewer companies accounted for those emissions and said the calculations weren’t as “well developed.”

The SEC proposed the rule a year ago requiring publicly traded companies to disclose their greenhouse gas emissions on a tiered system: Scope 1 were direct emissions from operations; Scope 2 were indirect emissions from purchasing oil, gas and other forms of energy; and Scope 3 disclosures were far more nebulous. The latter required firms to account for and disclose carbon emissions produced up and down the supply chain by outside vendors, suppliers and partners.  

“There are far more companies that are already disclosing Scope 1 and 2,” Gensler said during an interview with the Council of Institutional Investors on Monday. Scope 3 disclosures, however, weren’t “as well developed,” he said.

“Again, I don’t want to get ahead of staff recommendations, but I think even when we made the proposal, we took different approaches to the different levels of disclosure,” he said.

The SEC received a record 15,000 or so comments on the rule, “more than we’ve gotten on any other role in the history of our commission,” Gensler said. Any final rule will take that into consideration, he said.

“About a third of those are unique comments, weighing in on different aspects of the rule, whether it’s weighing in on from the investor side or the issuer side,” Gensler said. “And it’s just sorting through those and seeing how we move forward.”

Gensler has previously said the agency was considering making “adjustments” to the rule, given the volume of public comments.

He told CNBC in an interview last month it was customary for the agency to “review all that, think through the economics, think through the legal authorities that commenters have raised. It’s quite customary to make adjustments.”

But a group of Democratic lawmakers are pressing Gensler not to drop Scope 3 disclosures from the final rule.

“Reports that the Commission may weaken or altogether drop Scope 3 emissions disclosure requirements in the final rule are particularly concerning,” states a March 5 letter addressed to Gensler from Sens. Elizabeth Warren, of Massachusetts, and Sheldon Whitehouse, of Rhode Island, as well as House Reps. Dan Goldman, of New York, and Jamie Raskin, of Maryland.

The letter is also signed by 47 other Democratic lawmakers, who argue that companies could hide their true carbon footprint without Scope 3 disclosures.

“Without comprehensive Scope 3 emission disclosures, companies could also simply offload emissions-intensive activities to suppliers or downstream customers to appear cleaner without actually lowering their emissions or the resultant transition risk, or redraw their organizational boundaries so subsidiaries that they own and operate are not part of their consolidated accounting group, as is common for private equity firms,” they wrote.

The lawmakers said the changes floated by the SEC are partly out of an attempt to avoid numerous lawsuits aimed at challenging the rule after its finalized.

The U.S. Chamber of Commerce, the largest business lobbying group in the U.S., called Scope 3 disclosure a “massively burdensome undertaking” in its comments on the rule. Republican lawmakers also have publicly come out against the rule, passing legislation in the House and Senate last week to overturn a related rule on ESG investing proposed by the Labor Department. President Joe Biden said he would veto the bill.

But Gensler said his agency is committed to staying within the boundaries of the law, particularly the Administrative Procedures Act, which governs final rulemaking processes, when deciding on how to finalize the rule.

“It means technically looking at efficiency, competition and capital formation,” he said.

“We get input on economics, we get input on legal authority, we get input of course on policy,” Gensler added. “And then staff considers it, makes recommendations up to the five-member commission … but it’s really staying within the law and how the courts interpret the law.”