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SEC Releases Proposed Rules Mandating Greenhouse Gas Disclosures

Rules would mandate companies to reveal three scopes of emissions

March 23, 2022

American companies are one step closer to revealing their role in the Earth’s increasing temperatures after the U.S. Securities and Exchange Commission (SEC) voted 3 to 1 on Monday to propose regulations requiring businesses to disclose their greenhouse gas emissions, The Hill reports.

Under the long-awaited rules, companies must also explain to investors how climate-related risks can affect the business finances. Potential risks include the rising frequency of severe weather, the potential costs of transitioning from fossil fuels, and a company’s own efforts to limit its carbon footprint. Companies will calculate these potential costs from data they already compile for regular disclosures to investors.

The regulations categorize greenhouse gas emissions under three categories. Companies will be required to disclose their Scope 1 emissions — the amount of greenhouse gas emissions they directly produce through their own business operations, such as manufacturing— along with their Scope 2 emissions—the energy, such as electricity, they purchase to keep their business running. Figures for Scope 1 and Scope 2 emissions must be audited by an outside party to ensure their accuracy.

In addition, some companies must report their Scope 3 emissions, which include emissions from the goods and services they purchased. However, firms will not face penalties if their Scope 3 emissions have mistakes or miscalculations.

Only companies that have set up Scope 3 emissions reduction goals or consider these emissions to be part of their material, would be required to disclose these emissions, according to Axios. Critics believe these stipulations could allow companies to avoid disclosing Scope 3 emissions, which in many cases are the largest share of a company’s climate footprint.

Some lawmakers, the fossil fuel industry, and businesses likely to face higher regulatory costs and scrutiny are already expressing concerns about the proposed rules. The regulations are open for public comment for 60 days before the SEC can finalize and enforce them. The entire process could take several weeks or months.

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