Corporate Greenhouse Gas Disclosures

On March 21, 2022, the SEC proposed a rule that would make corporate greenhouse gas (GHG) emissions reporting mandatory. The rule would require nearly all public companies to report their GHG emissions, even if those emissions were not in themselves material to investors.  In doing so, the SEC has rejected the Sustainability Accounting Standards Board (SASB) single-materiality approach to climate disclosures in favor of the Greenhouse Gas Protocol (GHG Protocol) double-materiality approach. Under a single-materiality approach, disclosures are designed solely for use by investors; under a double-materiality approach, disclosures are designed for use by investors and other stakeholders—including the public.

Under SASB’s single-materiality approach, companies in most industries are not required to report their scope 1 and scope 2 emissions because—in SASB’s view—those emissions are not large enough to be material to investors. Under the GHG Protocol’s double-materiality approach, companies in all industries are required to report their scope 1 and scope 2 emissions. In adopting the GHG Protocol’s approach, the SEC apparently relied on the first prong of its authority to adopt regulations “necessary or appropriate in the public interest or for the protection of investors” (emphasis added). Mandatory reporting to some version of the GHG Protocol now appears inevitable in the United States.

The GHG Protocol is the product of an astonishing level of consensus. Dozens of participating NGOs, seeking to reflect the views of thousands of other interested NGOs, government agencies, and companies, have all accepted the principle that corporate GHG emissions should be reported in the form of scope 1 and scope 2 emissions. Eighty-one percent of S&P 500 companies voluntarily reported scope 1 and scope 2 emissions in corporate social responsibility reports for the year 2020.

Although the GHG Protocol is the dominant reporting standard worldwide, dozens of other protocols, standards, and frameworks—including SASB’s—authorize deviations. Corporate Greenhouse Gas Disclosures, which will be published in the UC Davis Law Review in November 2022, presents the first comprehensive study of voluntary corporate GHG reporting. The study consists of two parts: (1) a review of the complex array of protocols, standards, and frameworks that govern voluntary GHG reporting and (2) an empirical analysis of the 2020 GHG disclosures of two hundred randomly selected S&P 500 companies.

The empirical study revealed at least seven loopholes in the GHG Protocol. These are the loopholes and the SEC’s responses to them:

1. Alternate standards. The GHG consensus is not entirely around the language of the GHG Protocol. Several organizations, most notably The Climate Registry, offer different, and often less demanding, versions of the GHG Protocol. Some companies report to them instead of to the GHG Protocol. The SEC proposed rule would require reporting by all public companies to a single set of protocols.
2. Exclusions. Some companies excluded some emissions categories or geographical areas from their reported numbers. Some of the excluders asserted that their exclusions were de minimis and others estimated them. But thirty-three of one hundred sixty-two GHG emissions reporters (20%) did neither. The Climate Registry protocols expressly allow such exclusions, provided they are disclosed. The SEC proposed rule would permit some estimations but prohibit exclusions.
3. Lack of assurances. Nearly half the companies that reported their GHG emissions for 2020 did not obtain third-party assurances. Those companies can easily cheat. The proposed rule would require all but the smallest public companies to obtain assurances from independent auditors.
4. Boundaries. The GHG Protocol offers companies three options for determining their own boundaries: equity share, financial control, and operational control. In addition, it allows companies to avoid responsibility for a facility’s emissions merely by ceding control of the facility to an independent party, even while the companies retain ownership. The SEC’s proposed rule contains a single boundary specification applicable to all public companies. The degree to which companies would be able to manipulate the SEC’s boundary is unclear.
5. Conversions. The GHG Protocol and related protocols allows companies various options among ratios for converting other greenhouse gases to their CO₂ equivalents. The SEC proposed rule eliminates those safe harbors, leaving control over conversion rates to the audit process.
6. Biogenic emissions. Biogenic emissions are emissions from the combustion or decomposition of biomass other than fossil fuels, peat, or carbon minerals. Biomass is renewable organic material that comes from plants and animals. Biogenic CO₂ emissions are regarded as less harmful than emissions from fossil fuels because under natural conditions, biomass would degrade, and the carbon would return to the atmosphere anyway. The GHG Protocol requires biogenic emissions reporting but the numbers of companies reporting them are insufficient to include them in the ranking process. The SEC proposed rule does not address biogenic emissions, leaving it unclear whether and how they should be reported.
7. Scope 3 emissions. A company’s scope 3 emissions occur outside its boundaries. They are emissions that occur in the supply chain to produce the company’s product or that occur through use of the company’s product. Company rankings and comparisons cannot take scope 3 emissions into account because too few companies voluntarily report them. Yet scope 3 emissions dwarf scope 1 and scope 2 emissions. The SEC proposed rule requires the reporting of scope 3 emissions “if material” or if the company “has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.” As a practical matter, that leaves scope 3 emissions reporting largely voluntary. Even under the proposed rule, raters and rankers would not be able to use scope 3 emissions. But they can include the reporting of scope 3 emissions in formulae for rating and ranking the companies’ transparency.

None of these seven loopholes appear to be widely exploited. They probably do not yet render rankings of companies based on voluntary GHG emissions implausible. But as GHG rankings became more credible and so more powerful, companies inevitably would exploit the loopholes. Adoption of the SEC’s proposed rule would dramatically reduce the potential for such exploitation.

Stakeholders, including the public, will be able to use GHG data only through rankings by trusted intermediaries. To demonstrate the feasibility and utility of ranking S&P 500 companies based on corporate GHG emissions reports, the paper is accompanied by an interactive ranking of 200 companies randomly selected from among the S&P 500. The website presents five methods of ranking the companies: (1) by total scope 1 and scope 2 emissions, (2) by the ratio of total scope 1 and scope 2 emissions to the company’s revenues (emissions “intensity”), (3) by total scope 1 and scope 2 emissions within the company’s industry, (4) by total GHG emissions reported to the EPA, and (5) by intensity of emissions reported to the EPA. The rankings based on EPA reporting are considerably less useful because only 26% of S&P 500 companies report any emissions at all to the EPA.

The complete paper is available for download here.