Financial markets wrestle with Scope 3 requirements

IFR 2429 - 16 Apr 2022 - 22 Apr 2022
5 min read
Timothy Sifert

Companies around the world are starting to face the tough question of how to report hard-to-measure Scope 3 emissions data as more expansive disclosure rules come into effect and ESG capital markets start to require more aggressive pollution-mitigation targets.

The US Securities and Exchange Commission last month proposed rules that will require some US listed companies to report Scope 3 data, indirect emissions related to a company’s value chain like employee travel, or use and disposal of products sold.

The SEC recommended that Scope 3, along with direct emissions captured by Scope 1 and indirect Scope 2 emissions, be a part of regular filings in response to investor claims that such information is relevant to the financial performance of a company and decisions on whether to invest.

The proposal does not require all companies to report everything immediately, and Scope 3 reporting has been given some leeway. But it remains an open question when the technology will be properly developed to allow firms to assess accurately this category of emissions, which itself comprises 15 subcategories of possible data.

SEC chair Gary Gensler said this week the difficulties related to Scope 3 emissions are a reason why companies have been given more time to report them.

Not yet

“The commission proposed different requirements for Scope 1 and 2 on the one hand as opposed to Scope 3 on the other,” he said on Tuesday during a webinar on the disclosure rules hosted by Ceres, an NGO working to promote ESG capital markets. “Methodologies for determining Scope 3 emissions currently aren’t as well developed as the others – just yet.”

Paul Donofrio, vice chair of Bank of America who oversees the lender’s sustainability activities, described the broad proposal as “very constructive and headed in the right direction”. He said one of the most important things will be that all the relevant ESG data that are eventually included in filings can be trusted.

While some firms, including BofA, already report some Scope 3 emissions, most companies cannot do so with a level of accuracy that will be required by the proposed SEC rules and ESG data assurance firms that are tasked with certifying emissions information.

“Right now I think everybody should be able to in the immediate term calculate and communicate their Scope 1 and 2 emissions,” said Donofrio, BofA’s chief financial officer until last year, during a virtual media roundtable on April 8. “But when it comes to Scope 3 – from the perspective of really understanding those emissions – that’s a little harder.”

This is one reason why BofA and others are in favour of the exceptions made for Scope 3 reporting in the current draft, such as a safe harbour for liability and exemptions for smaller companies. If companies are forced to report comprehensive Scope 3 emissions too soon, and mistakes are made, it risks damaging the reputation of the entire climate-disclosure endeavour.

“Data have to be developed; there’s a lot of double-counting. There’s all sorts of issues around Scope 3,” Donofrio said.


He said he wasn’t suggesting that the SEC omit requirements for all of these disclosures.

“My point is that Scope 3 disclosures today might be subject to a lot of uncertainty, would not get the [necessary] assurance, therefore would not be trusted,” he said. “And it might call into question other disclosures.”

Even if the SEC delays mandating Scope 3 data longer than expected, it does not mean all companies are in the clear.

ESG portfolio managers, for example, have been seeking to have issuers of sustainability-linked bonds include more Scope 3-related targets in their frameworks to illustrate their commitment to cutting their carbon footprint.

At the same time, the market for SLBs is growing particularly quickly – even as green bond volumes dipped slightly in the first quarter along with an overall slowdown in debt issuance. Global volume of SLBs rose 173% to US$30bn in the first three months compared with a year earlier, Refinitiv data show. Green bond volumes, meanwhile, fell 5.4% to US$115.7bn.

Yet while some companies have begun to include Scope 3-related targets in their SLB documents, it has hardly become the norm. That, too, will take time.

And market participants who say the proposed SEC disclosure rules are unrealistic still have time to let the regulator know.

“Since the proposal’s been released, we’ve already gotten a lot of feedback, some of it for the proposal, some of it against," Gensler said on Tuesday. "That’s what we need to hear, and we need to hear the reasons too.”