Sierra Club tells SEC of need for standardized rule on emissions disclosures

Investors and other market participants are increasingly relying on emissions disclosures like those outlined in the SEC's climate disclosure proposal, which is why a standardized rule is needed, according to the Sierra Club, a grassroots environmental organization.

Emissions estimates are already used to evaluate progress on emissions reductions among companies in fund managers' portfolios with so-called "climate-aligned" offerings; financial risks faced by companies due to lack of preparedness for the decarbonization of the economy; and efforts to drive emissions reductions within supply chains, among other use cases, the Sierra Club, said in a comment letter to the SEC, citing a new analysis from Madison Condon, an associate professor at the Boston University School of Law.

The comment letter was in response to an SEC proposal unveiled in March 2022 that would require public companies to disclose a host of climate-related information in their registration statements and periodic reports, including the oversight and governance of climate-related risks by the company's board and management, and how any identified climate-related risks have affected or are likely to affect the company's strategy, business model and outlook, among other requirements.

The requirement that received the most significant debate in the proposal's comment period, which ended in June, centers on greenhouse gas emission disclosures. Under the proposal, public companies would be required to disclose the greenhouse gas emissions they generate (Scope 1) or purchase (Scope 2), and the indirect emissions generated from a company's supply chain, if material, though smaller companies would be exempt from the latter requirement, referred to as Scope 3.

The proposal has broad backing from institutional investors and asset managers.

Citing Ms. Condon's analysis, the Sierra Club said that if the SEC proposal is scaled back and Scope 3 disclosures are excluded from a mandatory reporting regime, investors and academic experts worry that outsourcing of Scope 1, or direct, emissions will increase. "This would in turn distort investor evaluation of transition risk," the Sierra Club letter said.

Moreover, Scope 3 emissions disclosures are generally seen by investors and other market participants as insufficient by themselves to allow evaluation of firms' climate risk, according to Ms. Condon's research.

The Sierra Club, which leads the Fossil-Free Finance campaign that pushes major financial institutions to reduce their investments in fossil fuels, is a major proponent of the SEC proposal. Also, more than 50 congressional Democrats last month called on the SEC to quickly finalize the proposal and maintain the Scope 3 requirements.

But Congressional Republicans have a different viewpoint, and on Feb. 22, three leading Republicans wrote a letter to SEC Chairman Gary Gensler stating that the proposal exceeds the agency's mission, expertise and authority and, if finalized in any form, will unnecessarily harm consumers, workers and the U.S. economy.

The SEC is expected to finalize the rule this year.