The U.S. Securities and Exchange Commission (SEC) is on the verge of implementing the long-awaited Climate Related Disclosure Standards, expected to be finalized in March. Reports indicate that the SEC has opted to eliminate the mandatory Scope 3 reporting requirement concerning greenhouse gas emissions within a company's supply chain. This decision is aimed at bolstering the rule's legal defensibility against anticipated challenges, although certainty of success remains uncertain.
The Climate Related Disclosure Standards, initially proposed in March 2022, align with global sustainability reporting standards. While the final rule is yet to be disclosed, the draft rule introduces three levels of greenhouse gas reporting. Scope 1 focuses on a company's direct GHG emissions, Scope 2 covers GHG emissions from energy providers, and Scope 3 encompasses emissions along the supply chain, including those of private suppliers to public companies and end consumers.
Key contentious aspects include Scope 3 reporting and Regulation S-X, which mandates companies to revise past disclosures through footnotes to account for severe weather events and sustainability transition costs. The development of the Climate Related Disclosure Standards mirrors the European Union's Corporate Sustainability Reporting Directive, which enhances reporting obligations for EU-based businesses, expanding beyond financial reporting to encompass environmental, social, and governance actions.
Simultaneously, the International Sustainability Standards Board has formulated the International Financial Reporting Standards Foundation Sustainability Disclosure Standards, adopted in June 2023 as the global benchmark for sustainability and climate change reporting, including GHG emissions. While the U.S. follows Generally Accepted Accounting Principles (GAAP) instead of IFRS, the SEC's jurisdiction is limited to publicly traded companies, unlike the EU's authority over all businesses.
Amid legal and political challenges, the SEC is reportedly considering making Scope 3 reporting optional in the final CRDS draft, granting companies discretion based on materiality. However, public commitments related to Scope 3 emissions may necessitate mandatory disclosure. The SEC acknowledges the impending legal scrutiny, particularly regarding its regulatory authority and potential congressional involvement, with the Supreme Court's textualist stance adding pressure on the SEC to navigate these complexities judiciously.
