June 22, 2022

SEC’s Climate Disclosure Proposals: Impact on Private Companies

If you’re a private company that’s part of public company value chains, you may well find yourself confronting some pretty significant – and costly – challenges imposed on you by virtue of those public companies’ need to comply with the SEC’s proposed “Scope 3” GHG emissions disclosure requirements. Scope 3 emissions include all indirect GHG emissions occurring in the upstream and downstream activities of a company’s value chain, and in case you’re wondering where public companies will look to get that kind of information, this CFO Dive article says that you need wonder no longer:

“If the private company is within the value chain, upwards or downwards, of a company that has to provide the Scope 3 metric in their report, they will be asked to help provide that information,” says Julie Rizzo, a partner in the capital markets group of K&L Gates. “They’ll roll up into that company’s Scope 3 emissions that have to go into their SEC reporting.”

Scope 3 refers to greenhouse gas emissions from companies that help a covered company make money, either by being part of its supply chain or providing other value-added services. And whether or not they are subject to SEC reporting requirements themselves, they are expected to cooperate with the covered company. That means measuring and sharing the emissions that stem from their work for that company.

“So, you’re going to have companies that aren’t necessarily thinking that they would be covered by this rule having to provide information to companies that need to provide that information,” Rizzo told Legal Dive.

Opponents of the SEC’s proposals have highlighted the potential impact of the Scope 3 emissions disclosure requirement on private companies. However, supporters discount those concerns. For example, this recent comment letter from group of Senate Democrats (see p. 5) contends that that, among other things, the requirement to provide Scope 1 and Scope 2 information will make the process of obtaining Scope 3 information – which won’t be required until a year later – easier for all parties. In addition, the signatories to that letter argue that a public company’s ability under the proposed rules to use an EPA-published emission factor in its calculations in the absence of activity data will help “some privately held companies with data collection challenges, like small family farm operations, that supply registrants responsible for Scope 3 disclosures.”

John Jenkins