While the proposed requirement to disclose material Scope 3 greenhouse gas emissions seems to be one of the most contentious—if not the most contentious—element of the SEC’s climate disclosure proposal (see this PubCo post and this PubCo post), two of the SEC’s Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, told Bloomberg that they think it still doesn’t go far enough. They are advocating that Scope 3 GHG emissions data be subject to attestation—like the proposed requirement for Scopes 1 and 2—to ensure that it is reliable. This discussion might just be a continuation—or perhaps a reinvigoration—of an internal debate that reportedly led to delays in issuing the proposal to begin with. As previously discussed in this PubCo post, the conflicts were reportedly between SEC Chair Gary Gensler and the two other Democratic Commissioners, Lee and Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation. One major issue at the time, Bloomberg reported, was whether to mandate disclosure of Scope 3 GHG emissions, which, some companies contended, is not under their control and “unfairly makes companies vulnerable to shareholder lawsuits and government enforcement actions.” Another major point of contention was reportedly was whether to require that auditors sign off on the emissions disclosures. The current proposal may reflect a compromise on these issues, but apparently one that does not sit comfortably with Lee and Crenshaw.
You probably recall that the SEC defines:
- “Scope 1 emissions as direct GHG emissions from operations that are owned or controlled by a registrant;
- Scope 2 emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant; and
- Scope 3 emissions as all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain. Upstream emissions include emissions attributable to goods and services that the registrant acquires, the transportation of goods (for example, to the registrant), and employee business travel and commuting. Downstream emissions include the use of the registrant’s products, transportation of products (for example, to the registrant’s customers), end of life treatment of sold products, and investments made by the registrant.”
Drawing on the Greenhouse Gas Protocol, the SEC’s new climate disclosure proposal would require disclosure of a company’s Scopes 1 and 2 GHG emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. Under the proposal, each accelerated and large accelerated filer, including foreign private issuers, would be required to include in its filings an attestation report covering the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the provider of the attestation. In particular, the SEC is proposing to require a minimum level of attestation services including: “(1) limited assurance for Scopes 1 and 2 emissions disclosure that scales up to reasonable assurance after a specified transition period; (2) minimum qualifications and independence requirements for the attestation service provider; and (3) minimum requirements for the accompanying attestation report.” As proposed, accelerated filers and large accelerated filers would have one fiscal year to phase-in limited assurance and two additional fiscal years to transition to providing reasonable assurance, starting with the respective compliance dates for Scopes 1 and 2 disclosure, although a company could elect to transition earlier.
The SEC indicates that “limited assurance” is “equivalent to the level of assurance (commonly referred to as a ‘review’) provided over a registrant’s interim financial statements included in a Form 10-Q.” The objective of limited assurance, the SEC continued,
“is for the service provider to express a conclusion about whether it is aware of any material modifications that should be made to the subject matter (e.g., the Scopes 1 and 2 emissions disclosure) in order for it to be fairly stated or in accordance with the relevant criteria (e.g., the methodology and other disclosure requirements specified in proposed [Item 1504 of Reg S-K.] In such engagements, the conclusion is expressed in the form of negative assurance regarding whether any material misstatements have been identified. In contrast, the objective of a reasonable assurance engagement, which is the same level of assurance provided in an audit of a registrant’s consolidated financial statements, is to express an opinion on whether the subject matter is in accordance with the relevant criteria, in all material respects. A reasonable assurance opinion provides positive assurance that the subject matter is free from material misstatement.”
(For some of the criticisms of limited assurance, see this PubCo post.)
In recent interviews, Bloomberg reports, the two Commissioners said that they were “interested in requiring companies to obtain independent reviews for all parts of their carbon footprints—going beyond the current SEC draft that would let companies skip third-party assessments of disclosures about their Scope 3 greenhouse emissions. ‘Scope 3 is the bulk of many, many companies’ emissions,’ Lee said. ‘And so, it’s important.’” However, because Scope 3 emissions are typically not under the company’s control, calculating that data can be very difficult. That challenge may be compounded by the lack of uniform standards for calculating Scope 3 emissions data. (See, for example, the opinion expressed by a panelist at a meeting of the SEC’s Investor Advisory Committee, who, while otherwise generally supporting the proposal, indicated that she favored a postponement of the Scope 3 disclosure requirement until standards and methodologies were developed and companies had Scopes 1 and 2 reporting under their belts. See this PubCo post.)
Perhaps because of that challenge, the two Commissioners expressed their concern about the absence of safeguards. As reported, Lee contended that “[w]e need to get to the place where there’s the kind of reliability and assurance around Scope 3 that we’ll have for Scopes 1 and 2.” As currently proposed, not only is no attestation required for Scope 3 emissions data, but, in addition, the SEC has proposed to provide a safe harbor that the company’s statements regarding Scope 3 emissions in an SEC filing would be “deemed not to be a fraudulent statement,” unless the statements were “made or reaffirmed without a reasonable basis or was disclosed other than in good faith.” According to the article, Crenshaw “said she isn’t sure the SEC’s current proposal adequately calibrated the checks on Scope 3 emissions disclosures and is open to considering changes. ‘Scope 3 emissions involve data that may be more difficult to collect and then calculate compared to Scopes 1 and 2….So bringing rigor and accuracy to this space is important, and I am interested in hearing how we can best achieve that.”
An academic quoted in the article contended that Scope 3 emissions disclosures “don’t lend themselves well to traditional checks on corporate reporting….Auditors routinely test whether a company’s financial reporting can be trusted. But an auditor or other outside verifier, for example, is unlikely to get sufficient responses calling a cellphone maker’s customers to adequately evaluate any Scope 3 emissions data about its customers’ use of electricity to power its device….’The tools of auditors aren’t designed for something as nebulous as Scope 3 is,’” he said.
Nevertheless, some companies have voluntarily released Scope 3 data that includes some type of assurance. Most often, however, companies have obtained only limited assurance with regard to GHG emissions.
Notably, Lee has indicated that she will be stepping down from the SEC as soon as the nominee to replace her, Jaime Lizarraga, has been confirmed. He has apparently not given any indication of his views on assurance. SEC Commissioner Hester Peirce, the sole remaining Republican on the SEC at this time, voted against the proposal. She told Bloomberg that “she wasn’t sure the agency has the authority to mandate climate disclosures, let alone require independent reviews of Scope 3 emissions information. ‘Scope 3 is in itself quite an ambiguous metric….This is the difficulty that we get in when we ask companies to start disclosing things that are not easy to pin down.’”
