How SEC ESG disclosure rules will impact private companies

Public companies are waiting to see when and how the Securities and Exchange Commission makes its proposed environmental, social and governance (ESG) disclosure rules final. But private companies can’t ignore what comes out if they’re part of a covered company’s value chain or if they’re thinking about going public in the near future, a specialist on the matter says. 

 “If the private company is within the value chain, upwards or downwards, of a company that has to provide the Scope 3 metric in their report, they will be asked to help provide that information,” says Julie Rizzo, a partner in the capital markets group of K&L Gates. “They’ll roll up into that company’s Scope 3 emissions that have to go into their SEC reporting.”

Scope 3 refers to greenhouse gas emissions from companies that help a covered company make money, either by being part of its supply chain or providing other value-added services. And whether or not they are subject to SEC reporting requirements themselves, they are expected to cooperate with the covered company. That means measuring and sharing the emissions that stem from their work for that company.

“So, you’re going to have companies that aren’t necessarily thinking that they would be covered by this rule having to provide information to companies that need to provide that information,” Rizzo told Legal Dive.

Heavy emissions

By some estimates, Scope 3 emissions are the biggest source of greenhouse gasses and that can help account for why the SEC would want companies to include them in their reporting. 

A financial institution, for example, might have little to report under what are known as Scope 1 and Scope 2 emissions, which refer, respectively, to emissions generated directly by the company and those generated indirectly, through carbon trading, for example. But a manufacturing company that has taken out a loan with the financial institution could be a big source of emissions, and that would be covered under Scope 3. 

“The financial firm bears a share of responsibility and risk for those emissions based on its investment in a company,” says Alexandra Thornton, senior director of tax policy at the Center for American Progress. 

Not all public companies will have to report Scope 3 emissions in the proposed version of the rules. 

If it’s a smaller reporting company (SRC), defined as one with less than $250 million in public float or has less than $100 million in annual revenue plus a public float of less than $700 million, or a larger company whose Scope 3 emissions are considered immaterial or hasn’t included Scope 3 emissions in their reduction targets in the past, the emissions don’t have to be reported. 

Even so, some companies must be careful because the SEC has indicated it plans to take a broad approach to determine how a company has conveyed its reduction targets in the past. A company that hasn’t published reduction targets in, say, a sustainability report it gives to investors could still be thought to have done so if it talked about them elsewhere.   

“The SEC is looking at tweets, social media that people put out … even talking about a statement made in a webinar,” Rizzo said. “So, one of the things it’s helpful to think about, as they’re thinking about ESG strategy and their disclosures, is how they’re putting information out there publicly.”

Resilience strategy

The SEC is taking comments on disclosure rules until later this month with the goal of releasing a final rule at some point, possibly later this year. 

The rules are part of an effort to help investors and other stakeholders know how well a company is prepared to keep making money to the extent climate change causes disruption to its business model. The rules, in their proposed version, ask companies to look at how well their governance structure is set up to monitor and adjust policy as disruptions occur, how management plans to transition to a more disruptive future, among other things. 

The company will have to include information about what it’s doing in its filings with the SEC. That includes the S-K and 10-K, and in the notes to financial statements.

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