ESG climate rule on thin ice: Emissions reporting will burden smaller firms most

Thousands of concerned stakeholders told the Biden administration to pare down or yank its controversial climate change disclosure rule. The sticking point is a requirement for companies to calculate and report indirect aka scope 3 emissions of greenhouse gases (GHGs).

Securities and Exchange Commission (SEC) chair Gary Gensler told the Senate Banking Committee he’s holding off on finalizing the environmental, social and governance (ESG) reporting rule, which was on schedule for promulgation in October.

Gensler cited widespread concerns the rule would be especially onerous to smaller-sized companies based on many of the 16,000 comments the rule’s received so far. He noted that the SEC has thus far promulgated 22 rules during the first three years of the Biden administration, on par with SEC rulemaking under past administrations, and isn’t going to “rush” through a problematic rule.

As usual, the Democrats are urging Gensler to push the rule through while Republican lawmakers want the SEC to pull it outright. But are industry stakeholders (and Gensler) right about the potential burdens on smaller companies?

Bigger companies with wider supply chains can erase emissions overnight

Answer: There’s no question they’re right. Bigger companies will be able to find all kinds of ways to deduct their emissions of carbon dioxide, methane and hydrofluorocarbons used in refrigeration and air-conditioning equipment all along their supply chains.

Case in point: In 2017 Microsoft publicly reported it was responsible for 22 million metric tons (mmts) of GHGs. But then it took a second look at its carbon footprint using the Environmental Protection Agency’s (EPA) guide on scope 3 emissions.

By the time the software giant was done, it managed to deduct 11 mmts of so-called global warming gases reported. Half of its GHG output wiped out overnight via clever accounting.

EPA defines scope 3 emissions as resulting from “activities from assets not owned or controlled by the reporting organization … [that] indirectly impacts in its value chain. … [scope 3 emissions] often represent the majority of an organization’s total GHG[s].”

The SEC rule would require publicly traded companies to report material risks posed by climate change to their business and their financial statements, physical risks such as sea level rise and severe storms, and direct and indirect GHG emissions.