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SEC Includes Scope 3 Emissions Reporting in Overhaul of Rules Governing Climate-related Disclosures

On March 21, 2022, the SEC released and approved a proposed rulemaking package that would enact sweeping changes to climate-related disclosures. 

Importantly, the proposed rule will require companies to estimate and disclose Scope 3 emissions, meaning indirect emissions as a result of activities from assets not owned or controlled by the company.  Much different than Scope 1 and Scope 2 emissions which some business are already required to calculate and relate to emissions from company-controlled sources or indirect emissions from purchased energy, Scope 3 emissions require a company to quantify emissions from more peripheral sources involved in the company’s business.  Likely given the difficulty of accounting for Scope 3 emissions, among other disclosure requirements, the proposed rule would phase-in Scope 3 reporting requirements with the earliest reporting date in 2025 (for FY 2024). Of course, the final rule may differ from the proposed approach, as the rule is subject to a notice and comment period, which will run for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer. 

While significant changes are on the horizon, Scope 3 reporting requirements are not immediate -- companies have time to thoroughly consider their approach. Critical questions for companies affected by the proposed rulemaking at this time are (1) will Scope 3 reporting remain in final rule and, if so, what does a likely appeal timeline look like, (2) what is the likelihood of success for an appeal, (3) how will companies accurately account for Scope 3 emissions, and (4) should companies change any practices or strategies from a business perspective based on the proposed mandatory reporting of Scope 3 emissions. 

"The Securities and Exchange Commission today proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements."

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esg, environment, banking and securities, finance

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