In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:
- Governance, strategy, risk and related disclosures outside the financial statements
- Greenhouse gas emission disclosures and attestation requirements
- Financial statement disclosures
As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.
Subsequent posts in this series have addressed proposed disclosures for:
- Risks, strategy, business model and outlook
- Risk management processes
- Targets, goals and interactive data
- Scopes 1 and 2 greenhouse gas disclosures
This post explores proposed disclosures for Scope 3 greenhouse gas emissions. The next post will focus on greenhouse gas intensity and methodology disclosures. As a reminder, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.
A Starting Note
Much of approach in the proposed rule is based on the Greenhouse Gas Protocol (GHG Protocol). The GHG Protocol is designed to provide “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.” You can learn about the protocol and get information about available tools to build a reliable GHG inventory at the GHG Protocol website.
General Disclosure Requirements
As a reminder from our last post, the overall disclosure requirement specifies what must be disclosed and for which periods. The proposed rule would require that companies disclose their GHG emissions, as defined in proposed S-K Item 1500(h).
Proposed S-K Item 1500(h) provides this definition of GHG emissions:
GHG emissions means direct and indirect emissions of greenhouse gases expressed in metric tons of carbon dioxide equivalent (CO2e), of which: (1) Direct emissions are GHG emissions from sources that are owned or controlled by a registrant. (2) Indirect emissions are GHG emissions that result from the activities of the registrant, but occur at sources not owned or controlled by the registrant.
Direct and indirect GHG emissions would be disclosed using the definitions of Scopes 1, 2, and 3 emissions which are included in S-K 1500 and are based on the definitions in the GHG Protocol. The disclosures would also be required to be disaggregated by type of greenhouse gas and in the aggregate in terms of CO2e. (Our previous post discusses the requirement for Scopes 1 and 2 emissions.)
The various types of greenhouse gases are specified in proposed S-K Item 1500(g):
Greenhouse gases (“GHG”) means carbon dioxide (CO2), methane (“CH4”), nitrous oxide (“N2O”), nitrogen trifluoride (“NF3”), hydrofluorocarbons (“HFCs”), perfluorocarbons (“PFCs”), and sulfur hexafluoride (“SF6”)
In addition, disclosures of Scopes 1, 2, and 3 emissions would exclude the impact of any purchased or generated offsets.
The periods specified in the proposed rule are the most recently completed fiscal year, and “to the extent such historical GHG emissions data is reasonably available,” for earlier years included in its consolidated financial statements.
Scope 3 Emissions
The Proposed Rule would require companies to disclose total Scope 3 emissions if they are material or if the company has set “a GHG emissions reduction target or goal that includes its Scope 3 emissions.” This amount would be disclosed separately from Scopes 1 and 2 emissions.
Disclosure would include categories of upstream or downstream activities. Additionally, if any categories of Scope 3 emissions are significant, Scope 3 emissions data would be presented separately for such categories.
Proposed S-K Item 1500 includes this definition of Scope 3 emissions:
Scope 3 emissions are 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.
(1) Upstream activities in which Scope 3 emissions might occur include:
(i) A registrant’s purchased goods and services;
(ii) A registrant’s capital goods;
(iii) A registrant’s fuel and energy related activities not included in Scope 1 or Scope 2 emissions;
(iv) Transportation and distribution of purchased goods, raw materials, and other inputs;
(v) Waste generated in a registrant’s operations;
(vi) Business travel by a registrant’s employees;
(vii) Employee commuting by a registrant’s employees; and
(viii) A registrant’s leased assets related principally to purchased or acquired goods or services.
(2) Downstream activities in which Scope 3 emissions might occur include:
(i) Transportation and distribution of a registrant’s sold products, goods or other outputs;
(ii) Processing by a third party of a registrant’s sold products;
(iii) Use by a third party of a registrant’s sold products;
(iv) End-of-life treatment by a third party of a registrant’s sold products;
(v) A registrant’s leased assets related principally to the sale or disposition of goods or services;
(vi) A registrant’s franchises; and
(vii) Investments by a registrant.
Disclosure would also include the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:
Emissions reported by entities in the company’s “value chain” and whether such information is verified or unverified;
Information about specific activities reported by entities in the company’s value chain; and
Information “derived from economic studies, published databases, government statistics, industry associations, or other third-party sources.”
Smaller reporting companies would not be required to disclose Scope 3 emissions.
The complexity and related costs of identifying and estimating Scope 3 emissions have been the subject of comments in the SEC’s rulemaking process. Our next post will explore the proposed intensity and methodology disclosures for greenhouse gas emission.
As always, your thoughts and comments are welcome!
For reference, here is proposed S-K Item 1504:
(Item 1504) GHG emissions metrics.
(a) General. Disclose a registrant’s GHG emissions, as defined in § 229.1500(h), for its most recently completed fiscal year, and for the historical fiscal years included in its consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available.
(1) For each required disclosure of a registrant’s Scopes 1, 2, and 3 emissions, disclose the emissions both disaggregated by each constituent greenhouse gas, as specified in § 229.1500(g), and in the aggregate, expressed in terms of CO2e.
(2) When disclosing a registrant’s Scopes 1, 2, and 3 emissions, exclude the impact of any purchased or generated offsets.
(b) Scopes 1 and 2 emissions.
(1) Disclose the registrant’s total Scope 1 emissions and total Scope 2 emissions separately after calculating them from all sources that are included in the registrant’s organizational and operational boundaries.
(2) When calculating emissions pursuant to paragraph (b)(1) of this section, a registrant may exclude emissions from investments that are not consolidated, are not proportionately consolidated, or that do not qualify for the equity method of accounting in the registrant’s consolidated financial statements.
(c) Scope 3 emissions.
(1) Disclose the registrant’s total Scope 3 emissions if material. A registrant must also disclose its Scope 3 emissions if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Disclosure of a registrant’s Scope 3 emissions must be separate from disclosure of its Scopes 1 and 2 emissions. If required to disclose Scope 3 emissions, identify the categories of upstream or downstream activities that have been included in the calculation of the Scope 3 emissions. If any category of Scope 3 emissions is significant to the registrant, identify all such categories and provide Scope 3 emissions data separately for them, together with the registrant’s total Scope 3 emissions.
(2) If required to disclose Scope 3 emissions, describe the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:
(i) Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified;
(ii) Data concerning specific activities, as reported by parties in the registrant’s value chain; and
(iii) Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.
(3) A smaller reporting company, as defined by §§ 229.10(f)(1), 230.405, and 240.12b-2 of this chapter, is exempt from, and need not comply with, the disclosure requirements of this paragraph (c).
(d) GHG intensity.
(1) Using the sum of Scope 1 and 2 emissions, disclose GHG intensity in terms of metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production relevant to the registrant’s industry for each fiscal year included in the consolidated financial statements. Disclose the basis for the unit of production used.
(2) If Scope 3 emissions are otherwise disclosed, separately disclose GHG intensity using Scope 3 emissions only.
(3) If a registrant has no revenue or unit of production for a fiscal year, it must disclose another financial measure of GHG intensity or another measure of GHG intensity per unit of economic output, as applicable, with an explanation of why the particular measure was used.
(4) A registrant may also disclose other measures of GHG intensity, in addition to metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production, if it includes an explanation of why a particular measure was used and why the registrant believes such measure provides useful information to investors.
(e) Methodology and related instructions.
(1) A registrant must describe the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions. The description of the registrant’s methodology must include the registrant’s organizational boundaries, operational boundaries (including any approach to categorization of emissions and emissions sources), calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions. A registrant’s description of its approach to categorization of emissions and emissions sources should explain how it determined the emissions to include as direct emissions, for the purpose of calculating its Scope 1 emissions, and indirect emissions, for the purpose of calculating its Scope 2 emissions.
(2) The organizational boundary and any determination of whether a registrant owns or controls a particular source for GHG emissions must be consistent with the scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, the registrant’s consolidated financial statements.
(3) A registrant must use the same organizational boundaries when calculating its Scope 1 emissions and Scope 2 emissions. If required to disclose Scope 3 emissions, a registrant must also apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions. Once a registrant has determined its organizational and operational boundaries, a registrant must be consistent in its use of those boundaries when calculating its GHG emissions.
(4) A registrant may use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates.
(i) When disclosing its GHG emissions for its most recently completed fiscal year, if actual reported data is not reasonably available, a registrant may use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.
(ii) In addition to the use of reasonable estimates, a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions.
(5) A registrant must disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions. When disclosing the use of third-party data, it must identify the source of such data and the process the registrant undertook to obtain and assess such data.
(6) A registrant must disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year.
(7) A registrant must disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. A registrant’s GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant’s GHG emissions in each scope of emissions. If a registrant discloses any data gaps encountered when calculating its GHG emissions, it must also discuss whether it used proxy data or another method to address such gaps, and how its accounting for any data gaps has affected the accuracy or completeness of its GHG emissions disclosure.
(8) When determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a registrant must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing.
(9) If required to disclose Scope 3 emissions, when calculating those emissions, if there was any significant overlap in the categories of activities producing the Scope 3 emissions, a registrant must describe the overlap, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions.
(f) Liability for Scope 3 emissions disclosures.
(1) A statement within the coverage of paragraph (f)(2) of this section that is made by or on behalf of a registrant is deemed not to be a fraudulent statement (as defined in paragraph (f)(3) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.
(2) This paragraph (f) applies to any statement regarding Scope 3 emissions that is disclosed pursuant to §§ 229.1500 through 229.1506 and made in a document filed with the Commission.
(3) For the purpose of this paragraph (f), the term fraudulent statement shall mean a statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud as those terms are used in the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules or regulations promulgated thereunder.