On March 21, 2022, the U.S. Securities Exchange Commission (“SEC”) approved and released a proposed rulemaking package (the “Proposed Rule”) that would enact sweeping changes to climate-related disclosures.  One key component of the Proposed Rule is a reporting requirement for certain Scope 3 emissions.

What are Scope 3 Emissions

Scope 3 emissions are “all other indirect emissions not accounted for in Scope 2 emissions.”  These emissions relate to emissions from sources outside a company’s control – for example, Scope 1 emissions are direct emissions from sources owned or controlled by a company, and Scope 2 emissions are emissions primarily resulting from the generation of electricity consumed by the company.  While companies generally can calculate Scope 1 and 2 emissions without significant difficulty, estimating Scope 3 emissions presents additional challenges, as Scope 3 emissions occur from other entities not owned or controlled by the company that serve the company’s value chain.

Who Must Report

The Proposed Rule requires non-smaller-reporting-company (“SRC”) registrants to disclose Scope 3 emissions and intensity: (i) if material or (ii) if the registrant set a GHG emissions reduction target or goal that includes Scope 3 emissions.  Thus, the Proposed Rule does not require reporting of all Scope 3 emissions, and a company’s obligation to report would depend on company-specific factors, discussed below.

First, the Proposed Rule exempts SRCs from disclosing Scope 3 emissions.  The SEC defines SRCs as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) had a public float of less than $250 million; or (2) had annual revenues of less than $100 million and either: (i) no public float; or (ii) a public float of less than $700 million.[1]

Second, the Proposed Rule applies a materiality qualifier to Scope 3 emissions that companies must report.  SEC regulations and Supreme Court precedent define “material” emission as emissions with a “substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision.”[2]  The SEC provides several examples of material Scope 3 emissions.  Generally, the SEC advises that Scope 3 emissions may be material where they assist investors to understand transaction risks.  Companies with significant Scope 3 emissions could face disruptions in cash flow and business models to the extent new laws or policies encourage changes to products, suppliers, distributors, or other commercial providers in a company’s value chain.  Moreover, consumer demand could influence a shift to less carbon-intensive products and services.  Conversely, companies sourcing materials and products with lower emissions compared to competitors may see cost savings and higher demand from consumers.  Thus, the SEC’s materiality approach is quite broad and requires companies to understand their company’s value, risks, and opportunities in deciding whether to  report Scope 3 emissions.

Third, even if Scope 3 emissions do not represent material emissions, a company must report Scope 3 emissions if it adopted emissions targets.  The Proposed Rule requires a company to disclose whether its emissions targets include Scope 3 emissions, and if they do, report such emissions.  This requirement allows investors to track a company’s compliance with its emissions targets and gauge what potential additional investments a company might need to implement to meet its targets.

Leniency on Scope 3 Calculation Methodology

While the Proposed Rule generally adopts the features of the GHG Protocol, a major difference between the Proposed Rule and the Protocol is the Proposed Rule’s leniency on how companies calculate GHG emissions, including Scope 3 emissions.  The SEC rule does not mandate conformance with GHG Protocol emission calculation methodology.  The SEC’s intends this deviation as an opportunity for a company to choose the methodology that best suits its portfolio and financing activities.  However, regardless of the methodology used, companies must disclose the methodology as part of its filing.

Safe Harbor Provisions

Considering the sweeping changes to climate-related disclosures in the Proposed Rule, the SEC proposes key provisions to lessen the compliance burden, including the exemption for SRCs, discussed above, a delayed compliance date for Scope 3 emissions reporting, and a safe harbor provision (insulating a company from certain securities law liabilities) for Scope 3 emissions disclosures.

First, the Proposed Rule staggers compliance with Scope 3 reporting, providing substantial time for companies to consider their approach to compliance with the reporting obligations.  For Scope 3 emissions, the Proposed Rule provides an additional year before the rule mandates reporting of Scope 3 emissions.  While the Proposed Rule sets the earliest compliance requirements for 2024 (filing for FY 2023), the Proposed Rule requires the first Scope 3 emission disclosures in 2025 (filing for FY 2024) for Large Accelerated Filers, and in 2026 (filing for FY 2025) for Accelerated and Non-Accelerated Filers.

Second, the Proposed Rule includes a safe harbor provision with respect to liability for Scope 3 emissions disclosed pursuant to the Proposed Rule and made in a document filed with the SEC.  This limitation on liability would deem a Scope 3 disclosure not fraudulent unless it was made or reaffirmed without a reasonable basis or disclosed other than in good faith.

What Comes Next

The Proposed 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. During this time, the SEC will accept public comments on its Proposed Rule.  Last March, the SEC requested information via a statement by then-Acting Chair Allison Herren Lee’s statement on climate change disclosures and received approximately 600 comment letters in response.  Now that the Proposed Rule has been published, the SEC will likely receive substantially more comments, which it must consider and address before a rule can be finalized and enforced.  This process of considering public comments may take months to complete.

The SEC’s final rule, to the extent it largely reflects the proposal, will likely be challenged under the Administrative Procedure Act. One possible basis for a challenge would be the Scope 3 disclosures.  Industry groups will likely try to stay the regulations pending litigation by arguing that any reporting associated with Scope 3 disclosures are outside the scope of the SEC’s authority or that the SEC was only permitted to require disclosure of “material” emissions.

As with any administrative rule, industry groups will be looking for routes to challenge the rule under the Administrative Procedure Act.  If such a challenge is raised, it is possible that a court would be sympathetic to an argument  that the public interest and balance of equities weigh in favor of granting an injunction, just as the Louisiana district issued a preliminary injunction, barring the use of the Biden Administration’s social cost of carbon figure.

If the final rule faces challenges in court, its implementation may well be delayed.  And with the possibility of a new administration being elected for the next term, this rule faces much uncertainty.

A Coordinated Federal Approach

The SEC’s Proposed Rule follows on the efforts of other Federal regulators who have already taken steps in identifying and assessing the risks posed to U.S. financial markets by climate change.  In the fall of 2020, the U.S. Commodity Futures Trading Commission (“CFTC”) published a report entitled Managing Climate Risk in the U.S. Financial System and in 2021 set up a separate Climate Risk unit within the CFTC.  At this time the CFTC requires very limited disclosures from its regulated entities, however climate risks identified in the report and the SEC Proposed Rule are expected to prompt more robust climate risk disclosures in commodity and commodity derivatives markets.  The Federal Reserve Board, the Financial Stability Oversight Council, the Federal Housing Financing Agency and the Treasury Department’s Federal Insurance Office also are working on concrete steps necessary to assess, mitigate and prepare for climate change risks.


[1] 17 C.F.R. 229.10(f)(1), 230,45, and 17 C.F.R. 240.12b-2.

[2] 17 C.F.R. 240.12b-2.