Why you should care about the SEC’s proposed climate rule

On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) issued Proposed Rule S7-10-22: The Enhancement and Standardization of Climate-Related Disclosures for Investors. The proposed rule includes disclosure guidelines for publicly-traded companies around:

• Climate-related risks (qualitative).

• Greenhouse gas (GHG) emissions (quantitative).

While your company may not be publicly traded, if you do significant business with a company that submits filings to the SEC (i.e., “SEC company”), you could get swept up in the 510 pages of disclosure requirements. And, ultimately, that’s a good thing. Here’s why.

In addition to disclosing emissions in their operations (Scope 1 and Scope 2), as the proposed rule stands, companies will be required to disclose value chain emissions (Scope 3) from 2023 to 2026. If you’re a supplier to an SEC company, that means you! Increased disclosure generally leads to increased reduction targets, as what’s made visible then becomes eligible to address. This is particularly true when what’s visible is also undesirable. In this case, GHG emissions are the uglier side of operations that you wish weren’t there.

As SEC companies seek to reduce their supply chain emissions, they must collaborate with suppliers to make reductions. SEC companies do not have the same level of control with suppliers as they do in their own operations, meaning they need to influence, encourage, and/or mandate continued business. Presuming you don’t simply get a mandate without any support, this development raises the potential for SEC companies to provide resources for their suppliers to make improvements.

The SME Climate Hub, established as a joint effort among several institutions, was set up to promote exactly this type of collaboration, if not directly related to the SEC rule. Ultimately, you should be proactive on your GHG emissions profile in the eyes of many investors and other potential customers, so this drive to include Scope 3 emissions as a material issue benefits you, as well, as it drives greater resources for clean value chains.

Ultimately, the proposed SEC rule does not represent any functionally new requirements for a great number of companies that are already voluntarily reporting value chain emissions. As the international climate reporting platform, CDP reports over 13,000 companies are reporting to them, representing 64% of global market capitalization. CDP doesn’t guarantee Scope 3 value chain inclusion in that reporting, but it’s a good indicator.

Over 3,000 multinationals have either set or committed to set science-based targets under the Science Based Targets Initiative (SBTi), meaning they are not only quantifying value chain emissions but actively seeking ambitious emission reductions. SBTi requires the inclusion of value chain emissions if they are over a certain threshold. As one measure of the prevalence of value chain reporting, all of our clients that have engaged with SBTi have had to include Scope 3. If you work in manufacturing, consumer packaged goods, or even in services with significant business travel, you’re likely to have to do the same.

Companies that are already engaged with CDP and SBTi are well-situated to meet the demands of any SEC rule, as that rule is being designed for compatibility with existing voluntary reporting standards. Those companies are also likely to be collaborating with suppliers in the near term, if not already.

If you are a supplier to an SEC company that has not already engaged with you for climate-related reasons—and the proposed rule moves forward as it now stands—know that engagement is likely to happen as the SEC rule becomes implemented. Even better, prepare now to ensure your GHG disclosure ability is adequate to support your customers when those requirements take effect and be clear about where you need support to help them meet their goals.

Founder of Climate Positive Consulting, leading the firm’s practice in carbon footprint reduction strategy; Author at Routledge.