The Securities and Exchange Commission (SEC) on Wednesday adopted final rules directing public companies to disclose certain greenhouse gas (GHG) emissions that are directly and indirectly related to their businesses, although the federal agency stopped short of requiring the disclosure of emissions beyond companies’ operations but within their value chains.
The final rules are related to Scope 1 and 2 GHG emissions. Scope 1 emissions are those controlled or owned by an organization and may be produced by company-owned vehicles or buildings. Scope 2 are indirect and could be emissions from purchased electricity.
The rules exclude Scope 3 emissions, which are extremely difficult for an organization to monitor and include upstream activities such as business travel and purchased goods, and downstream activities such as how a customer uses a product. For defense contractors, Scope 3 emissions would cover downstream activities such as the Army’s use of tanks built by General Dynamics [GD] and Navy’s use of Boeing [BA]-built fighter aircraft.
The rules were first proposed in March 2022.
Eric Fanning, president and CEO of the Aerospace Industries Association, welcomed the exclusion of Scope 3 emissions.
“In particular, we appreciate the understanding that Scope 3 emissions at this moment are far too difficult to track with sufficient accuracy and would overly burden aerospace companies and their supply chain,” Fanning said in a statement. “We also thank the SEC for extending the schedule to allow our companies to better prepare for the impacts of this rule. As this rule is implemented, the aerospace industry will continue to be a close partner with the U.S. government to reduce carbon emissions and create a greener future.”
The SEC’s final rule is separate from a rulemaking process underway at the Defense Department, General Services Administration, and NASA that is looking to impose Scope 1, 2, and 3 emissions requirements on federal contractors. Congress last December in the fiscal year 2024 National Defense Authorization Act (NDAA) prohibited DoD from requiring defense contractors from having to disclose their GHG emissions (Defense Daily, Dec. 14, 2023). The NDAA prohibition is in effect for one year.
The SEC’s rules will be phased in based on a company’s public float—which is a multiple of shares outstanding that the public can trade and current market price—and in some cases on company size, and the content being disclosed. The rules go into effect 60 days after publication in the Federal Register.
The SEC is requiring GHG disclosures to give investors, and potential investors, more information to make more informed decisions about the “climate-related risks” to public companies.