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Last week, Meredith blogged about the debate over the possibility that the SEC’s climate rules might contain a “back door” through which Scope 3 emissions disclosures might be required. During the ABA Business Law Section’s “Dialogue with the Director” held on Friday, Corp Fin Director Erik Gerding confirmed that quantifying Scope 3 emissions in SEC filings is purely voluntary, and that the agency didn’t intend to introduce the possibility of a back door Scope 3 disclosure requirement. That’s welcome reassurance, but at the risk of being accused of seeing ghosts, I still think that some companies may face tough decisions about whether to “voluntarily” disclose Scope 3 emissions data.

In his remarks, Director Gerding acknowledged that while the rules don’t require Scope 3 disclosure, registrants with transition plans or targets & goals incorporating reductions in Scope 3 emissions will need to describe qualitatively how they are managing that process. That’s where I think things might get a little sticky, because the disclosure called for by the relevant Reg S-K line items is pretty granular. For example, Item 1504 requires registrants to address the following in their targets & goals disclosure:

– The scope of activities included in the target;
– The unit of measurement;
– The defined time horizon by which the target is intended to be achieved, and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
– If the registrant has established a baseline for the target or goal, the defined baseline time period and the means by which progress will be tracked; and
– A qualitative description of how the registrant intends to meet its climate-related targets or goals.

In addition, registrants must disclose any progress made toward meeting the target or goal and how any such progress has been achieved. Registrants are also required to discuss any material impacts to the business, results of operations, or financial condition directly resulting from the target or goal or the actions taken to make progress toward meeting it, and to provide quantitative and qualitative disclosures about material expenditures and impacts on financial estimates and assumptions directly resulting from the target or goal or actions take to make progress toward it.

As Sullivan & Cromwell pointed out in its memo on the climate change rules, “[g]iven the broad scope of the disclosure requirements under Item 1504, a company may need to disclose Scope 3 emissions metrics on an annually updated basis if it has a Scope 3 emissions reduction target that has materially affected, or is reasonably likely to materially affect, its business, results of operations or financial condition.”

I think the Staff is likely to take a hard look at Item 1504 disclosures during the review process. In light of Director Gerding’s comments, I doubt very much that the Staff will call for disclosure of Scope 3 emissions data in comment letters, but unless it applies a light touch, some of the comments on Item 1504 disclosure for companies with Scope 3 targets & goals could prove to be difficult to resolve. It seems plausible to me that after going a few rounds with the Staff on these comments, some companies may decide to “voluntarily” disclose Scope 3 data in order to resolve them.

– John Jenkins