Despite the U.S. Securities and Exchange Commission’s (SEC) final Climate Disclosure rule being weaker than I—along with many others in the sustainability sector—had hoped, the trend towards transparency, particularly for scope 3 emissions, is undeniably gaining momentum in the U.S. and around the world. California’s SB 253 and the European Union’s Corporate Sustainability Reporting Directive (CSRD) already set the bar for corporate emissions disclosure, which impact approximately 5,000 and 50,000 companies, respectively, by including scope 3 emissions in their mandates.
Climate-related disclosures in regulated filings aims to inform investors and capital markets of material financial risk so they can price that risk and efficiently allocate capital. In the SEC rule, the exclusion of scope 3 emissions, which comprise the vast majority—80% to 90%—of most companies’ greenhouse gas emissions, is a counterproductive misjudgment that undermines the very goal of the new rules.
By limiting emissions disclosure requirements to scope 1 and scope 2, the SEC has left out the crucial piece of the puzzle that peels back the curtain on a company's environmental impact and climate-related risk exposure. Without scope 3 disclosures, investors don’t have a complete picture to make truly informed investment decisions.
Scope 1 and 2 account for energy-related GHG emissions, and much of the infrastructure needed to measure and report this data is already built into businesses’ everyday operations (e.g., electricity metering and fuel consumption invoices). Scope 3 emissions, on the other hand, result from indirect value chain activities that support every other aspect of the company, both upstream activities related to the supply chain and downstream activities related to the product or services the company provides. Across the 28,000 comment letters the SEC received in response to the proposed rule, scope 3 emissions were the most common objection, and the regulator cited this pushback as the reason for its decision to omit scope 3 reporting requirements.
While the SEC’s watered-down rule requires the bare minimum reporting, other regulations out of Europe (CSRD) and California (SB 253)—the second and fifth largest global economies—already dictate the path forward by requiring scope 3 emissions disclosure, impacting more than 10x the number of companies globally, compared to the SEC rule. While more challenging to address, scope 3 emissions have emerged as the crux of corporate decarbonization goals, with regulators and corporate actors taking swift action to enhance data capture and enable suppliers.
The SEC’s scope 3 omission and its implications
Despite the SEC’s omission of scope 3 from the final rule, they mandate reporting of material scope 1 and 2 emissions. “Material” (or material impact) refers to the emissions from activities that a reasonable investor would likely consider when making an investment decision. In other words, passing the SEC rule signifies a clear acknowledgment that risks from climate change are a financially material consideration equal to more traditional investment risk factors, requiring standardized and transparent disclosure. However, again, without insight into scope 3 emissions, investors are forced to make decisions with only about 10% of the necessary information.
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Given the importance of scope 3 to operationalize decarbonization, its exclusion from the SEC’s Climate Disclosure rule is a missed opportunity. Alongside mandated reporting of scope 1 and 2 emissions, regulations that push for transparency in scope 3 emissions reporting raise the bar by setting a global expectation for disclosure. I’m bullish on the fact that current and future laws across other jurisdictions will mandate or already are mandating nearly every business to track and report scope 3 emissions. Consequently, the downstream pressure from enterprises requiring their suppliers to measure, report, and ultimately reduce their emissions will accelerate progress toward more comprehensive reporting and global net-zero goals.
While the federal mandate is less ambitious than initially proposed, the writing on the wall is clear: as global economies transition to net-zero, markets will require transparency and accountability from corporate actors across the value chain. Transparently reporting these indirect supply chain emissions will be the norm for businesses within the next decade, and companies that prepare now will not just be seen by customers as brand leaders ahead of their competitors; they’ll win across all other success metrics—growth, market share, investor relations, etc.
Beyond mandates, understanding the full scope of their emissions allows businesses to identify and capitalize on opportunities for operational efficiencies and cost savings.
Integrating scope 3 emissions into corporate strategy
Let's be clear: The SEC's recent decision is not an exemption from the growing global trend toward climate disclosures, but a call to action. Embracing the shift toward complete climate transparency is not only a regulatory necessity but a strategic imperative for companies aiming to thrive in the next decade and beyond. The recent SEC regulations mandate data disclosure starting as early as 2024 (with other phase-in perioids following in short order), so the time to act is now. To ensure their business stays ahead, executives must proactively adapt to the regulatory changes of today and tomorrow and, in doing so, lead the way in sustainable corporate accountability and responsibility.
At Sustain.Life, we've been helping clients stay at the forefront of these evolving standards since 2021. Over the past couple of years, we've seen major enterprises start to demand emissions disclosure from their suppliers, requiring them to report to robust frameworks like the CDP, allocate emissions to the customer or product level, and even set science-based emission reduction targets validated by third parties like SBTi. As enterprises push suppliers to enhance climate strategies, Sustain.Life bridges this capacity gap by enabling value chain businesses to build climate agency.
Our platform runs enterprise supply chain engagement programs across thousands of suppliers and leverages AI for automated emissions measurement and direct engagement. It offers an accessible solution for all value chain companies to efficiently meet the sustainability demands of major customers. By adopting such solutions, businesses can not only comply with evolving regulations but also position themselves as frontrunners as regulations gradually shift in favor of supporting true corporate responsibility.
Sources
1. U.S Securities and Exchange Commission, “Press release: SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors” https://www.sec.gov/news/press-release/2024-31
2. ESG Dive, “SEC drops scope 3 from final climate rule, takes phased approach to scope 1 and 2 reporting” https://www.esgdive.com/news/sec-final-climate-rule-scope-3-out-phased-approach-scope-1-scope-2/709420/
