Why the SEC climate rule might not standardize emissions reporting

By Avery Ellfeldt, Benjamin Storrow | 03/13/2024 06:25 AM EDT

The move may help the Securities and Exchange Commission defend the regulation in court but make it difficult for investors to compare companies’ emissions.

Traders work on the New York Stock Exchange floor on Nov. 3, 2023.

Traders work on the New York Stock Exchange floor on Nov. 3, 2023. Ted Shaffrey/AP

A landmark disclosure rule approved last week by the Securities and Exchange Commission was supposed to provide investors with a new tool to check whether public companies could back up their climate promises with actual data.

But whether the regulation will deliver the information investors are seeking remains an open question. The SEC will not require companies to follow a single, rigid standard for reporting planet-warming emissions. Instead, Wall Street’s top financial regulator will give companies leeway over how to calculate the information.

Analysts said the move represents a significant improvement over the status quo, in which a growing number of companies use different emissions accounting standards to voluntarily report their output of climate pollution. But they warned investors may still find it hard to compare emissions reports across companies, with firms likely using slightly different methodologies to calculate and report them.


“Is this going to lead to perfect comparability across all companies on emissions reporting? No,” said Janet Ranganathan, a managing director at the World Resources Institute, where she co-founded the group’s Greenhouse Gas Protocol. But it is “still going to add a lot of value, and it’s still going to meet some of [the SEC’s] primary objectives of providing investors with more risk information than they would have had otherwise.”

The Wall Street regulator unveiled the regulation last Wednesday amid intense debate over its aim to force every public company to disclose their climate-fueled threats.

Much of the controversy revolved around the agency’s original proposal to require companies to report the emissions associated with their operations and energy use, known as Scopes 1 and 2. But the agency stopped short of requiring that companies disclose so-called Scope 3 emissions tied to their customers and supply chains.

Since the SEC first proposed the rule in March 2022, Republican officials and business groups including the fossil fuel industry have accused the agency of veering outside its lane into environmental policy.

But the Biden administration, climate-concerned investors and SEC Chair Gary Gensler say investors and U.S. capital markets need more consistent, reliable and comparable information in order to accurately assess the impact of a warming planet on publicly traded companies.

The SEC in the final rule tried to strike a balance between achieving that goal while also guarding against legal challenges, analysts said.

The rule essentially establishes a series of principles that companies need to follow rather than prescribing a specific set of rules. For instance, it does not require companies to employ a single, rigid emissions reporting standard. Instead, it gives companies the option to use a range of existing standards that are based on the Greenhouse Gas Protocol, a reporting program developed by the World Resources Institute that is employed by many companies.

The final regulation contained some differences from the initial draft put forward by the SEC. Among them is that companies will only have to report their Scope 1 and 2 emissions if they determine the information would be material or important to their investors.

And where the agency had previously prescribed rules for the boundaries of a company — determining, for instance, when emissions should be attributed to a firm or its contractor — the final rule asks that companies describe what its boundaries are.

The changes seek to place the rule more firmly within the SEC’s traditional scope of regulation, said Elizabeth Dawson, a partner at Crowell & Moring who served in the Department of Justice’s environmental and natural resource division during the Obama administration.

“I don’t know that this final rule necessarily will clear the bar in terms of a court finding it within the statutory mandate, but I think they certainly are attempting to get it closer to what they think could pass muster,” she said.

Analysts said standardizing emission reporting was one of the primary motivations for the rule, given a flurry of recent corporate climate commitments and efforts to voluntarily report climate information. In 2023, for instance, more than 5,000 U.S. companies reported emissions data to CDP, a nonprofit that tracks corporate emissions.

But actually comparing across companies and industries can be difficult.

Many firms account their emissions differently. The details are often technical but they can dramatically alter a company’s climate math. The questions often concern issues such as what year to use as a benchmark to measure emission reductions against or how to count the pollution associated with a power plant or oil field jointly owned with another company.

Some environmental groups and watchdog organizations in turn have criticized companies for using different accounting techniques to embellish their reductions.

“At a broad level, there is a huge amount of variation in voluntary emissions reporting across a number of different dimensions: Do you report at all? What do you report? To who do you report it? And how do you report it?” said Asaf Bernstein, a finance professor at the University of Colorado, Boulder, who served as an academic adviser to the SEC on the new rule.

Multiple experts said the rule represents a significant step toward fixing that problem. Companies have long reported emissions data in voluntary sustainability reports. Now that information will be reported in official SEC filings, requiring “different levels of review, assurance, attestation, and analysis to improve the reliability of the figures,” said Jacob Hupart, co-chair of the ESG practice at the law firm Mintz Levin.

The rule requires firms to spell out which standard they employed, as well as the underlying assumptions and calculations used to report their figures. The decision provides companies with flexibility to determine the best way to report emissions data for investors, but it will also make it more difficult to compare emissions across companies.

That’s the case in part because the Greenhouse Gas Protocol is a flexible standard that is meant to be customized for different uses — a step the SEC didn’t take but could have, Ranganathan argued.

“If you just allow 100 companies to use the protocol, you would not necessarily get comparability because they may choose to use the flexibility mechanism in different ways, which then renders the result very different,” she added.

Still, she said the new rules represent progress for corporate emissions reporting.

Perfect comparability might not necessarily matter, Ranganathan said, because “if you compare two companies that you think are similar, and they’ve got very different emissions profiles, then you have the information to start asking questions to elucidate why they’re actually different.”

Matthew Dobbins, a partner at Vinson & Elkins who focuses on environmental litigation and regulation, said the same. But he added that the SEC included requirements for companies to eventually have their emissions data independently verified to “try and push for more consistency” down the line.

The approach represents an attempt to find a middle ground between critics, who said the SEC’s initial approach was too prescriptive and would burden companies, and efforts to standardize the data so it could be used to compare companies’ performance, Bernstein said.

“I think we’re in a much stronger position, and this was a big step,” he said. “The question of the size of that step depends on what we see.”