Concerns About Scope 3 Disclosure Continue to Haunt SEC Climate Disclosure Proposal

The House Committee on Financial Services’ Subcommittee on Oversight and Investigations hosted a hearing on Thursday on the Securities and Exchange Commission’s proposal on climate disclosure.

The proposal would require public companies to disclose material climate-related risks, including physical and transition risk. Physical risk is related to climate disasters and includes droughts, floods and hurricanes. Transition risk are risks with negative effects from the transition away from fossil fuels.

Public issuers would also have to disclose scope 1 and 2 greenhouse gas emissions. Scope 1 emissions are those emitted directly, and scope 2 are indirect emissions from power consumption. Issuers with a climate-related goal must also disclose scope 3 emissions, which are those produced by their supply chain.

Scope 3 disclosure is perhaps the most controversial item, despite it covering only issuers with climate-related goals. It is also the most complicated to calculate, and the proposal permits reasonable estimates.

Requiring scope 3 disclosures has drawn the ire of the agricultural industry, not because of the public companies in that sector, but because smaller farms supply larger companies that may be subject to scope 3 requirements. Those small farms, in turn, would have to supply that data to their customers, that would be required to disclose the information to investors, a process that could result in significant costs to the farmers.

Representative John Rose, R-Tennessee, said at the hearing that he is “most concerned about how this rule will impact the agricultural industry.” One bill, the Protect Farmers From the SEC Act, sponsored by Senator John Boozman, R-Arkansas, would specifically exempt agricultural firms from any emissions disclosure.

Bill Schultz, the vice president of Schultz Farms Inc. in Michigan, told the subcommittee that the SEC proposal would require farms to hire outside consultants at great cost in order to market their goods to larger firms.

Supporters of the proposal, such as Representative Sean Casten, D-Illinois, argued that sophisticated investors are acutely aware of climate risks, and if they are not disclosed, assets with high climate risk will be offloaded onto less sophisticated investors. Disclosure, Casten said, would help investors discover the true price of assets with high climate risk exposure.