[This post is Part II of a revision and update of my earlier post that primarily reflects the contents of the proposing release. Part I (here) covered the background of the proposal and described the SEC’s proposed climate disclosure framework, including disclosure of climate-related risks, governance, risk management, targets and goals, financial statement metrics and general aspects of the proposal. This post covers GHG emissions disclosure and attestation.]

So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper? That was the question I asked to open this PubCo post.  According to this article in the WSJ, the answer was 771 grams, a calculation performed by the Natural Resources Defense Council.  But how did they figure that out?  How public companies could be required to calculate and report on their GHG emissions is one of the major issues addressed by the SEC in its proposal on climate-related disclosure regulation issued last week. The proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” Drawing on the Greenhouse Gas Protocol, the proposal would, in addition to the disclosure mandate discussed in Part I of this Update, require disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. The disclosure would be included in registration statements and periodic reports in the section captioned “Climate-Related Disclosure.” At 510 pages, the proposal is certainly thoughtful, comprehensive and stunningly detailed—some might say overwhelmingly so. If adopted, it would certainly require a substantial undertaking for many companies to get their arms around the extensive and granular requirements and comply with the proposal’s mandates. How companies would manage this enormous effort remains to be seen.

Why does the SEC believe that the rules are necessary? The SEC makes its case as follows:

“Climate-related risks can affect a company’s business and its financial performance and position in a number of ways. Severe and frequent natural disasters can damage assets, disrupt operations, and increase costs. Transitions to lower carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of financing, technology and other market forces, can lead to changes in a company’s business model. Governments around the world have made public commitments to transition to a lower carbon economy, and efforts towards meeting those greenhouse gas (‘GHG’) reduction goals have financial effects that may materially impact registrants. In addition, banking regulators have recently launched initiatives to incorporate climate risk in their supervision of financial institutions. How a company assesses and plans for climate-related risks may have a significant impact on its future financial performance and investors’ return on their investment in the company. Consistent, comparable, and reliable disclosures on the material climate-related risks public companies face would serve both investors and capital markets. Investors would be able to use this information to make investment or voting decisions in line with their risk preferences. Capital allocation would become more efficient as investors are better able to price climate-related risks. In addition, more transparency and comparability in climate-related disclosures would foster competition. Many other jurisdictions and financial regulators around the globe have taken action or reached similar conclusions regarding the importance of climate-related disclosures and are also moving towards the adoption of climate-related disclosure standards.”

In its economic analysis, however, the SEC acknowledges the magnitude of the undertaking.  For companies that are not already gathering the information required to be disclosed under the proposed rules, they “may need to re-allocate in-house personnel, hire additional staff, and/or secure third-party consultancy services. Registrants may also need to conduct climate-related risk assessments, collect information or data, measure emissions (or, with respect to Scope 3 emissions, gather data from relevant upstream and downstream entities), integrate new software or reporting systems, seek legal counsel, and obtain assurance on applicable disclosures (i.e., Scopes 1 and 2 emissions). The SEC estimates the costs in the first year of compliance, for non-SRC registrants, “to be $640,000 ($180,000 for internal costs and $460,000 for outside professional costs), while annual costs in subsequent years are estimated to be $530,000 ($150,000 for internal costs and $380,000 for outside professional costs). For SRC registrants, the costs in the first year of compliance are estimated to be $490,000 ($140,000 for internal costs and $350,000 for outside professional costs), while annual costs in subsequent years are estimated to be $420,000 ($120,000 for internal costs and $300,000 for outside professional costs).”  Hmmmm.  Only time will tell how accurate those estimates are.

The comment period will be open for 30 days after publication in the Federal Register, or May 20, 2022 (60 days after the date of issuance and publication on sec.gov), whichever period is longer.

As summarized in the fact sheet, domestic and foreign public companies would be required to disclose:

  • “Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
  • The registrant’s governance of climate-related risks and relevant risk management processes;
  • The registrant’s greenhouse gas (‘GHG’) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
  • Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
  • Information about climate-related targets and goals, and transition plan, if any. “

Here are the rule proposal—over 500 pages!—and the press release.

GHG emissions metrics disclosure (Item 1504)


The SEC believes that GHG emissions data would help investors to assess exposure to “climate-related risks, including regulatory, technological, and market risks driven by a transition to a lower-GHG intensive economy,” as well as progress toward reduction goals.  Many commenters indicated that the GHG Protocol was the “most widely used global greenhouse gas accounting standard.” Accordingly, the proposal regarding disclosure of GHG emissions is based “primarily on the GHG Protocol’s concept of scopes and related methodology.”

The GHG emissions disclosures would be required (along with the other climate-related disclosures) under a separate caption, “Climate-Related Disclosure,” in registration statements and Exchange Act annual reports and tagged using Inline XBRL. Accelerated filers and large accelerated filers would need to attach to their filings an attestation report regarding Scopes 1 and 2 emissions and to provide certain related disclosures about the service provider. Although the attestation service provider need not be a registered public accounting firm, the proposal imposes “minimum attestation report requirements, minimum standards for acceptable attestation frameworks, and would require an attestation service provider to meet certain minimum qualifications.”

The proposal includes several phase-ins and other accommodations. The general compliance phase-in would be based on filer status, with additional phase-ins for disclosure of Scope 3 emissions as well as for the assurance requirement and the level of assurance.  As proposed, accelerated filers and large accelerated filers would have one fiscal year to phase-in limited assurance and two additional fiscal years to transition to providing reasonable assurance. Smaller reporting companies would be exempt from the Scope 3 emissions disclosure requirement, but for those subject to it, there would be a safe harbor from liability for Scope 3 emissions disclosure. The forward-looking statement safe harbor under the PSLRA would also be available to the extent that the disclosures include forward-looking statements and the company satisfied the requirements of the safe harbor.

Disclosure requirement

The proposed rules would require a company to disclose its GHG emissions for its most recently completed fiscal year and for the historical fiscal years included in its financials (to the extent the historical GHG emissions data is reasonably available). Under the proposal, consistent with the GHG Protocol, “greenhouse gases” are defined as “carbon dioxide (‘CO2’); methane (‘CH4’); nitrous oxide (‘N2O’); nitrogen trifluoride (‘NF3’); hydrofluorocarbons (‘HFCs’); perfluorocarbons (‘PFCs’); and sulfur hexafluoride (‘SF6’).” Commenters have indicated that GHG emissions are important to investment decisions because the data is quantifiable and comparable and can be used in conducting a transition risk analysis and to evaluate the company’s progress in meeting net-zero commitments. The data may also indicate the company’s ability “to reduce its carbon footprint in the face of regulatory, policy, and market constraints.”

GHG emissions would include both direct emissions from sources owned or controlled by the company and indirect emissions that result from the company’s activities, but occur at sources not owned or controlled by the company. The requirements of the proposal are based on the concept of “scopes” developed by the GHG Protocol, and the SEC has based its own definitions on those of the GHG Protocol. The SEC defines:

  • “Scope 1 emissions as direct GHG emissions from operations that are owned or controlled by a registrant;
  • Scope 2 emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant; and
  • Scope 3 emissions as all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain. Upstream emissions include emissions attributable to goods and services that the registrant acquires, the transportation of goods (for example, to the registrant), and employee business travel and commuting. Downstream emissions include the use of the registrant’s products, transportation of products (for example, to the registrant’s customers), end of life treatment of sold products, and investments made by the registrant.”

GHG emissions data compiled for the EPA’s own GHG emissions reporting program is consistent with the GHG Protocol—and with the proposed rules—allowing a company to use that EPA data to fulfill, in part, its GHG emissions disclosure obligations under the proposal.

The SEC is proposing to require that a company disclose separately its total Scope 1 emissions and its total Scope 2 emissions calculated from all sources that are included in the company’s “organizational and operational boundaries” as discussed below). In addition, for a company that is not a smaller reporting company (which would be exempt from Scope 3 disclosure), if the company’s Scope 3 emissions are material, or if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions, the company would also be required to disclose separately its total Scope 3 emissions.

For each of the Scopes 1, 2 and 3 emissions, the company would need to disclose the emissions both disaggregated by each constituent greenhouse gas and in the aggregate.  The GHG emissions data must be expressed “in terms of carbon dioxide equivalent (‘CO2e’),” which is “the common unit of measurement used by the GHG Protocol to indicate the global warming potential (‘GWP’) of each greenhouse gas.” Consistent with the GHG Protocol, the proposed rules would require disclosure of GHG emissions data in “gross terms, excluding any use of purchased or generated offsets.” The SEC suggests that these specifics could be useful information if, for example, regulations were adopted targeting a specific GHG.

Treatment of Scopes 1 and 2 emissions compared to Scope 3 emissions. The SEC is proposing to require all companies to disclose their Scopes 1 and 2 emissions, which are emissions that result from facilities owned or activities controlled by the company. Scope 3 is another story, because those emissions typically result from the activities of third parties in the company’s “value chain,” making collection of the data much more difficult. (According to press reports, the internal wrangling at the SEC—among the Democratic commissioners—over whether or not to require disclosure of Scope 3 emissions was fierce and one of the reasons for the delay in the release of the climate disclosure proposal. See this PubCo post and this PubCo post.) The EPA provides detailed guidance for calculation of Scopes 1 and 2, but apparently not for Scope 3. Nevertheless, in some circumstances, Scope 3 emissions may represent the bulk of a company’s emissions, and disclosure may be necessary in some cases “to present investors a complete picture of the climate-related risks̶—particularly transition risks̶—that a registrant faces and how GHG emissions from sources in its value chain, which are not included in its Scopes 1 and 2 emissions, may materially impact a registrant’s business operations and associated financial performance.”  In addition, companies sometimes do take steps to limit Scope 3 emissions.

Under the proposal, Scope 3 emissions would need to be disclosed only if those emissions are “material,” or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions, allowing investors to track the company’s progress toward its target. In determining materiality, the company would assess whether there is a substantial likelihood that a reasonable investor would consider the Scope 3 emissions important when making an investment or voting decision.  The SEC observes here that SCOTUS “recognized that ‘[d]oubts as to the critical nature’ of the relevant information ‘will be commonplace.’ But ‘particularly in view of the prophylactic purpose of the securities laws,’ and ‘the fact that the content’ of the disclosure ‘is within management’s control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect,’ namely investors.”

According to the SEC, some commenters indicated that, for many companies, Scope 3 emissions represent a large proportion of overall GHG emissions, and therefore, could be material. For example, in some industries, a transition to lower-emission products or processes is ongoing, making financial risks (e.g., the need to invest in lower emissions equipment) reasonably foreseeable for companies in those industries based on the emissions in their value chains. The SEC believes that investors may need information about “the full GHG emissions footprint and intensity…to determine and compare how exposed a registrant is to the financial risks associated with any transition to lower-emission products.”  More specifically, the SEC cited the auto industry as an example, where most of the emissions are from cars driven by customers, not from the company’s own manufacturing. There is already a transition underway to reduce emissions, and demand for electric vehicles is increasing. According to the SEC, this transition “raises financial risks for automobile manufacturers, which can be gauged, in part, by their Scope 3 emissions.” Likewise, financial institutions and investors that establish their own GHG emissions reduction goals may consider the total GHG emissions footprint of companies that they finance or invest in to meet their own goals.  For some of those companies, Scope 3 emissions may constitute a significant portion of their emissions.

In assessing materiality, the SEC advises that companies consider both quantitative and qualitative information.  Scope 3 emissions may be material when they make up a relatively significant portion of the company’s overall GHG emissions—some companies use a 40% threshold, although the SEC is not proposing a quantitative threshold.  Even if Scope 3 emissions constitute a relatively small proportion of overall GHG emissions, they could still be material “where Scope 3 represents a significant risk, is subject to significant regulatory focus, or ‘if there is a substantial likelihood that a reasonable [investor] would consider it important.’ Moreover, if a materiality analysis requires a determination of future impacts, i.e., a transition risk yet to be realized, then both the probability of an event occurring and its magnitude should be considered. Even if the probability of an adverse consequence is relatively low, if the magnitude of loss or liability is high, then the information in question may still be material.”

In addition, when a company has set a GHG emissions reduction target or goal that includes Scope 3 emissions, it would be required to disclose its Scope 3 emissions. The disclosure would allow an investor to assess the company’s “strategy for meeting its Scope 3 emissions target or goal and its progress towards that target or goal,” which may affect the company’s business.

If the company were required to disclose Scope 3 emissions, it must “identify the categories of upstream and downstream activities that have been included in the calculation of its Scope 3 emissions.” Proposed Item 1500(r) includes a long, non-exclusive list of upstream and downstream activities that could give rise to Scope 3 emissions.  Under the proposal, if any upstream or downstream activities were significant in calculating Scope 3 emissions, the company would be required to identify the categories and “separately disclose Scope 3 emissions data for each of those categories together with a total of all Scope 3 emissions.” As an example, the SEC cites a producer of oil and gas products that finds the end use of its sold products to be a significant category of activity resulting in Scope 3 emissions.

Under the proposal, to help investors assess the reliability of the data, companies required to disclose Scope 3 emissions would also need to describe the data sources used to calculate those emissions, including the use of any of the following:

  • Emissions reported by parties in the company’s value chain, and whether those reports were unverified or verified by the company or a third party;
  • Data concerning specific activities, such as liters of fuel consumed or hours of time operated, as reported by parties in the company’s value chain; and
  • Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of the value chain, including industry averages of emissions, activities, or economic data.

GHG Intensity. The proposed rules would also require a company to disclose the sum of its Scopes 1 and 2 emissions in terms of GHG intensity and to separately disclose the GHG intensity of its Scope 3 emissions, if required to disclose Scope 3 emissions. GHG intensity (or carbon intensity) means a ratio that expresses the impact of GHG emissions per unit of economic value (e.g., metric tons of carbon dioxide equivalent (CO2e) per unit of total revenues or per unit of production).  The selected unit of production should be relevant to the company’s industry. The measure is intended to provide context for the level of emissions relative to the scale of the company’s business, demonstrating the level of emissions efficiency.  The SEC believes that a standardized measure of GHG intensity can facilitate comparability and potentially indicate the likelihood of the company’s being affected by transition risks. The company would be required to disclose the methodology and other information required pursuant to the proposed GHG emissions metrics instructions (discussed below).

GHG emissions data for historical periods.  The proposed rules would require disclosure for the company’s most recently completed fiscal year and for the historical fiscal years included in the consolidated financial statements in the applicable filing, to the extent that the historical GHG emissions data is reasonably available. Typically, that would mean data for three years, but only two years for SRCs. The historical data should allow investors to analyze trends, track over time the company’s exposure to climate-related effects and assess how the company is managing the climate-related risks associated with those effects. The company would not be required to “provide a corresponding GHG emissions metric for a fiscal year preceding its current reporting fiscal year if, for example, it was not required to and has not previously presented such metric for such fiscal year and the historical information necessary to calculate or estimate such metric is not reasonably available to the registrant without unreasonable effort or expense.”

GHG emissions methodology and related instructions

Under the proposed rules, a company would need to describe the methodology, significant inputs and significant assumptions used to calculate its GHG emissions metrics, including organizational boundaries, operational boundaries, calculation approach and any calculation tools used to calculate the GHG emissions.  This information is intended to help investors understand the scope of the operations included in the GHG emissions metrics and how those metrics were measured.

Organizational boundaries. An initial step in calculation of Scopes 1 and 2 emissions is setting “organizational boundaries,” that is, determining the operations that are owned or controlled by the company for the purpose of calculating its GHG emissions. Under the proposal, a company would “set its organizational boundaries using the same scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, its consolidated financial statements.” Accordingly, when determining which entities would be subject to consolidation or which investments qualify for equity method accounting or proportionate consolidation, the company would apply the accounting principles it applied under GAAP. The company would then use the same organizational boundaries to determine whether to include all the emissions of an entity or just a proportional share of the emissions, if any, in the company’s Scopes 1 and 2 calculations.  Companies required to disclose Scope 3 emissions would apply the same organizational boundaries in identifying the sources of indirect emissions from its value chain over which it lacks ownership and control.

Operational boundaries.  “Operational boundaries” are the “boundaries that determine the direct and indirect emissions associated with the business operations owned or controlled by a registrant.” Operational boundaries are required to be described when the company describes its methodology, significant inputs and significant assumptions used to calculate its GHG emissions metrics. To determine the operational boundaries, a company would need to identify the emissions sources from its plants, offices and other operational facilities that are within its organizational boundaries and then categorize those emissions as either direct or indirect.  For example, many companies will have direct emissions (Scope 1) from stationary equipment (e.g., combustion of fuels in heaters) and transportation, and companies in some industries will have emissions from manufacturing processes and fugitive emissions sources (e.g., equipment leaks). Indirect emissions (Scope 2) would likely include, for example, purchased electricity. Under the proposal, a company would be required to describe its approach to categorizing its emissions and emissions sources as direct (for Scope 1) or indirect (for Scope 2) when describing its methodology for determining its operational boundaries.

Selection and disclosure of a GHG emissions calculation approach, including emission factors. Because companies rarely calculate emissions by directly monitoring the concentration and flow rate at the source—which would be the most accurate method—a company would need to select an approach to calculation of GHG emissions.  The proposal suggests that “an acceptable and common method for calculating emissions involves the application of published emission factors.”  An “emission factor” is defined as “a multiplication factor allowing actual GHG emissions to be calculated from available activity data or, if no activity data is available, economic data, to derive absolute GHG emissions.” So, as in this example I found online, to calculate GHG emissions, the company would multiply a level of activity data (e.g., kWh of electricity consumed by a facility) by an emission factor (e.g., grams of CO2 per kWh). Examples of activity data might include “kilowatt-hours of electricity used, quantity of fuel used, output of a process, hours of operation of equipment, distance travelled, and floor area of a building.”

In the absence of activity data, a company may use an emission factor based on economic data.  The example that the SEC provides here is of a company calculating Scope 3 emissions from purchased goods or services. In that event, the company “could determine the economic value of the goods or services purchased and multiply it by an industry average emission factor (expressed as average emissions per monetary value of goods or services).”

There are sets of emission factors published by the EPA, as well as a calculation tool.  Using in part the EPA’s emission factors, the GHG Protocol has also provided a set of emission factors and an emission  calculation tool, and the SEC indicates that there are several others. Once a calculation approach has been selected, the company must identify its choice of emission factors and its source, determine the data that must be collected and how to conduct the relevant calculations, including whether to use any publicly available calculation tools. The SEC advises that the emissions data should then be reported to the corporate level.

Here are a couple of the SEC’s examples:

“When determining its Scope 1 emissions for a particular plant, a registrant might add up the amount of natural gas consumed by furnaces and other stationary equipment during its most recently completed fiscal year and then apply the CO2 emission factor for natural gas to that total amount to derive the amount of GHG emissions expressed in CO2e. The registrant would repeat this process for each type of fuel consumed and for each type of source. If a registrant owns a fleet of trucks, it might total the amount of diesel fuel or other type of gasoline consumed for the fiscal year and apply the appropriate CO2 emission factor for that vehicle and type of fuel….[O]nce it has determined the amount of CO2e for each type of direct emissions source and for each facility within its organizational and operational boundaries, the registrant would then add them together to derive the total amount of Scope 1 emissions for the fiscal year.”

A similar process would apply to collecting Scope 2 data. According to the SEC, there are two common methods for calculating Scope 2 emissions for purchased electricity: under the market-based method, the company would apply emission factors and other data provided by the generator of electricity included in the contract; under the location-based method, the company would base its calculations on average energy generation emission factors for grids located in defined geographic locations, including local, subnational or national boundaries.  The company could use either or both methods or another method altogether. In all cases, the company “would be required to describe its methodology, including its organizational and operational boundaries, calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions.”

Although the SEC is not proposing to require use of a particular methodology for the financial sector to calculate Scope 3 emissions, which would likely include emissions from companies to which the financial institution provides debt or equity financing, the SEC notes that the Partnership for Carbon Accounting Financials’ Global GHG Accounting & Reporting Standard (the “PCAF Standard”) provides one methodology that was endorsed by the drafters of the GHG Protocol and was developed to work with the calculation of Scope 3 financed emissions for the “investment” category of downstream emissions.

Additional rules related to methodology disclosure. The SEC is also proposing a slew of additional do’s and don’ts in connection with disclosure of methodology:

  • Reasonable estimates may be used when disclosing GHG emissions as long as the company also describes the assumptions underlying, and the reasons for using, the estimates.
    •  To facilitate compliance with annual reporting deadlines, the SEC proposes that, when disclosing its GHG emissions for its most recently completed fiscal year, if actual reported data is not reasonably available, a company may use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the company promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.
    • In addition to the use of reasonable estimates, a company may present its estimated Scope 3 emissions as a range as long as it discloses its reasons for using the range and the underlying assumptions.  For example, a range may be helpful when a company has gaps in the data.
  • A company must disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions, identifying the source of the data and the process the company undertook to obtain and assess the data. While third-party data is commonly used in Scope 3 disclosure, this provision would also apply in other instances, such as when determining Scope 2 emissions using contractual, supplier-provided emission factors for purchased electricity.
  • A company must disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year, such as use of a different set of emission factors or development of a more direct method of measuring GHG emissions that results in a material change to the GHG emissions from the previous year.
  • A company must disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. Although the SEC expects a company’s GHG emissions disclosure to provide investors with a reasonably complete understanding of the company’s GHG emissions in each scope of emissions, the SEC recognizes that a company is more likely to encounter data gaps for Scope 3. If a company discloses any data gaps, it must also discuss whether it used proxy data or another method to address those gaps, and how that has affected the accuracy or completeness of its disclosure.
  • When determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a company must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing. This proposed provision is presumably intended to prevent a company from greenwashing its carbon footprint by outsourcing activities that are typically conducted as part of operations in order to reduce its Scopes 1 or 2 emissions.
  • If required to disclose Scope 3 emissions, when calculating those emissions, if there was any significant overlap in the categories of activities producing the Scope 3 emissions, a  company must describe the overlap, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions. For example, if the total reported Scope 3 emissions involved some double-counting because of the overlap, a company would be required to report this effect.

Scope 3 safe harbor and other accommodations

The SEC acknowledges that calculating Scope 3 emissions will be a, uh, challenge: companies may have difficulty obtaining activity data from suppliers and other third parties in their value chains and verifying that the data is accurate, and companies may be compelled to rely on a lot of estimates and assumptions. To address that issue, the SEC is proposing a targeted safe harbor for Scope 3 emissions disclosure, an exemption from Scope 3 reporting for SRCs and delayed compliance for Scope 3 disclosures.

The proposed safe harbor would provide that a statement by or on behalf of the company in an SEC filing regarding Scope 3 emissions under the requirements of the proposal would be “deemed not to be a fraudulent statement,” unless the statement was “made or reaffirmed without a reasonable basis or was disclosed other than in good faith.”  “Fraudulent statement” would mean a “statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud” as those terms are used in the Securities Act and the Exchange Act and related rules.

All affected companies would have an additional year to comply initially with the Scope 3 disclosure requirement; as proposed, SRCs would be exempt from Scope 3 disclosure.

Below is the SEC’s table showing the GHG metrics disclosure phase-in, assuming a December 2022 effective date and a December 31 FYE.

Registrant TypeDisclosure Compliance Date
 All proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3GHG emissions metrics: Scope 3 and associated intensity metric
Large Accelerated FilerFiscal year 2023 (filed in 2024)Fiscal year 2024 (filed in 2025)
Accelerated Filer and Non-Accelerated FilerFiscal year 2024 (filed in 2025)Fiscal year 2025 (filed in 2026)
SRCFiscal year 2025 (filed in 2026)Exempted

Finally, the SEC highlights the availability for the proposed Scope 3 emissions disclosures of “Securities Act Rule 409 and Exchange Act Rule 12b-21, which provide accommodations for information that is unknown and not reasonably available….These rules allow for the conditional omission of required information when such information is unknown and not reasonably available to the registrant, either because obtaining the information would involve unreasonable effort or expense, or because the information rests peculiarly within the knowledge of another person not affiliated with the registrant.”  Did you breathe a sigh of relief?  Not so fast—the SEC adds this caveat: “We expect, however, that a registrant that requires emissions data from another registrant in its value chain would be able to obtain that data without unreasonable effort or expense because of the increased availability of Scopes 1 and 2 emissions data for registrants following the effectiveness of the proposed rules.”


Don’t panic yet!  Software help is on the way!  Or so says the WSJ in this article.  According to the article, both start-ups and tech giants are working on or already marketing carbon-accounting software that is supposed to allow companies to “quickly work out their environmental impact.” Last year, the article reports, the sector attracted $356 million in VC funding. Often companies use industry averages to figure out supply chain emissions, but according to a company co-founder, “drilling down to specific numbers for each supplier means companies can identify the targets that will achieve the biggest cuts to emissions.”  As described in the article, “[c]arbon-accounting software typically plugs into a company’s computer systems, so it can pull information such as details on goods purchased and electricity consumption. Each data point is converted into a greenhouse-gas tally using specialized emissions databases, such as those that measure the carbon output of a certain type of machine running for a set period.”  For example, “[b]usiness-travel emissions can…be worked out based on the fuel consumed or the distance traveled, with the option to also allow for employees’ nights on the road using a ‘hotel emission factor.’”  But what about measuring the carbon footprint of shredded parmesan for a food company? According to the article, cheese is a very carbon-intensive ingredient that is hard to measure because its emissions depend in part on how the company’s suppliers deal with their cow’s manure.  How does the software address that challenge?

Attestation of Scope 1 and Scope 2 Emissions Disclosure (Item 1505)

According to the SEC,  there has been increasing investor demand for climate-related financial information that is reliable, leading many companies to voluntarily obtain third-party assurance over their climate-related disclosures. The SEC observes that fragmentation in the levels of assurance provided (e.g., limited versus reasonable), the assurance standards used, the types of service providers and the scope of disclosures covered has led to diminished comparability and investor confusion, especially as some assurance providers may lack GHG emissions expertise.  To address these issues, the SEC is proposing to require a minimum level of attestation services for accelerated filers and large accelerated filers including: “(1) limited assurance for Scopes 1 and 2 emissions disclosure that scales up to reasonable assurance after a specified transition period; (2) minimum qualifications and independence requirements for the attestation service provider; and (3) minimum requirements for the accompanying attestation report.”

The proposal would require assurance only for accelerated filers and large accelerated filers and only with respect to Scope 1 and Scope 2 emissions.  Under the proposal, each accelerated and large accelerated filer, including foreign private issuers, would be required to include in its filings an attestation report covering the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the provider of the attestation. As proposed, accelerated filers and large accelerated filers would have one fiscal year to phase-in limited assurance and two additional fiscal years to transition to providing reasonable assurance, starting with the respective compliance dates for Scopes 1 and 2 disclosure, although a company could elect to transition earlier.

The SEC indicates that “limited assurance” is “equivalent to the level of assurance (commonly referred to as a ‘review’) provided over a registrant’s interim financial statements included in a Form 10-Q.” The objective of limited assurance, the SEC continued,

“is for the service provider to express a conclusion about whether it is aware of any material modifications that should be made to the subject matter (e.g., the Scopes 1 and 2 emissions disclosure) in order for it to be fairly stated or in accordance with the relevant criteria (e.g., the methodology and other disclosure requirements specified in proposed [Item 1504 of Reg S-K.] In such engagements, the conclusion is expressed in the form of negative assurance regarding whether any material misstatements have been identified. In contrast, the objective of a reasonable assurance engagement, which is the same level of assurance provided in an audit of a registrant’s consolidated financial statements, is to express an opinion on whether the subject matter is in accordance with the relevant criteria, in all material respects. A reasonable assurance opinion provides positive assurance that the subject matter is free from material misstatement.”

Most often, on a voluntary basis, companies have obtained only limited assurance with regard to GHG emissions.

A company could also elect to obtain assurance for more disclosures than required under the proposed rules, such as assurance for the GHG intensity metrics, but would need to follow the same requirements and use the same attestation standard (e.g., the AICPA attestation standard) as the required assurance. Otherwise, Item 1505(e) prescribes the requirements for voluntary assurance.

Below is the SEC’s table showing the attestation phase-in, assuming a December 2022 effective date and a December 31 FYE.

Filer TypeScopes 1 and 2 GHG Disclosure Compliance DateLimited AssuranceReasonable Assurance
Large Accelerated FilerFiscal year 2023 (filed in 2024)Fiscal year 2024 (filed in 2025)Fiscal year 2026 (filed in 2027)
Accelerated FilerFiscal year 2024 (filed in 2025)Fiscal year 2025 (filed in 2026)Fiscal year 2027 (filed in 2028)

If the accelerated filer or the large accelerated filer has a non-calendar-year fiscal year-end date that results in the commencement of its 2024 or 2023 fiscal year, respectively, before the compliance dates of the rules, it would not be required to comply with proposed GHG emissions disclosure requirements until the following fiscal. Accordingly, for these filers, the time period for compliance with the corresponding attestation requirements would be one year later than illustrated above.

The SEC indicates that it is still considering, and is requesting comment on, whether to require management to include a statement in the annual report regarding its responsibility for the design and evaluation of controls over GHG emissions disclosures and its conclusion regarding the effectiveness of those controls. The SEC is also still considering whether to require the third-party attestation to cover the effectiveness of controls over GHG emissions disclosure.

GHG Emissions Attestation Provider Requirements

The attestation would need to be prepared and signed by a “GHG emissions attestation provider,” a person or a firm that is independent (comparable to auditor independence under Rule 2-01 of Reg S-X) and meets specified expertise criteria. The company would be required to obtain and attach the written consent of the GHG emissions attestation as an expert as required under the securities laws.

GHG Emissions Attestation Engagement and Report Requirements

The proposed rules would require the attestation report to be included in the section captioned “Climate-Related Disclosure” in the relevant filing.  Under the proposal, the report would be “provided under standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment,” similar to the requirements for determining a suitable, recognized control framework for use in management’s evaluation of ICFR.  Although the SEC does not prescribe a particular attestation standard, it notes that the attestation standards of the PCAOB, AICPA and IAASB, for example, would meet this due process requirement.

The proposal would impose minimum attestation engagement and report requirements, primarily derived from the AICPA’s attestation standards, including, for example, a requirement to identify the subject matter or assertion on which the attestation provider is reporting (e.g., Scope 1 and Scope 2 emissions disclosure), the time period to which the evaluation relates, the scope of work and level of assurance provided and the attestation standard used, as well as the criteria against which the subject matter was measured or evaluated. For an attestation report “solely covering Scopes 1 and 2 emissions disclosure, the identified criteria would include the requirements in proposed Item 1504 of Regulation S-K and, in particular, Item 1504(a), which includes presentation requirements such as disaggregation by each constituent greenhouse gas. The identified criteria would also include Item 1504(b) [e.g., calculation instructions] and the applicable instructions in Item 1504(e) regarding methodology, organizational boundary, and operational boundary.”

The attestation report would also be required to include a statement of the company’s responsibility to report on the subject matter or assertion being reported on, as well as a statement that describes the attestation provider’s responsibilities in connection with the preparation of the attestation report and a statement of the attestation provider’s independence. For a limited assurance engagement, the report would need to include a description of the work performed as a basis for the attestation provider’s conclusion. The report would also include a statement that describes any significant inherent limitations associated with the measurement or evaluation of the subject matter against the criteria, which is intended to elicit disclosure about the estimation uncertainties inherent in the quantification of GHG emissions. Finally, the report would include the opinion and signature.


A 2021 report from the Center for Audit Quality showed that just over half of the companies (264) in the S&P 500 had some type of independent verification of their climate data. Around 235 used an engineering or consulting firm; only 31 used an accounting firm.  In addition, the scope of assurance varied. The vast majority of assurance from engineering or consulting firms related solely to GHG metrics, with 123 covering only GHG, 79 covering GHG plus a select number of additional metrics (“GHG+”) and only 23 covering multiple metrics related to a broad range of topics. The standards employed also varied. Among audit firms, 27 applied the AICPA attestation standards, and four referenced the International Standard on Assurance Engagements 3000.  Among engineers and consultants, 162 applied ISO 14064-3 for greenhouse gases and 72 applied their own methodology, which they often indicated was based on ISAE 3000. 

Notably, regardless of the provider, the CAQ reported that the levels of assurance were, for the most part, not comparable to the levels provided in a financial statement audit. Among audit firms, 25 provided “limited assurance,” that is, they typically involved limited procedures and included reports that were framed in the negative—e.g., nothing has come to our attention to cause us to believe that the sustainability report has not been prepared, in all material aspects, in accordance with XYZ standards, or we are not aware of any material modifications that should be made to the schedule of sustainability metrics for it to be in accordance with XYZ criteria. Only two provided “reasonable” assurance (a positive opinion that the information is fairly presented in all material respects) and three were mixed. Similarly, among consultants and engineers, 174 provided “limited” assurance, 17 “reasonable” assurance, 17 “moderate” assurance and 15 were a mix.  (See this PubCo post.)

Additional disclosure by the company

 The SEC is also proposing that companies provide some additional disclosure related to the attestation under the “Climate-Related Disclosure” caption, including information about the attestation provider’s license, if any, any oversight inspection program to which the engagement is subject and any record-keeping requirements applicable to the attestation provider.

Disclosure of Voluntary Attestation

If a company (other than a large accelerated filer or accelerated filer) obtains a voluntary attestation regarding GHG emission disclosure, the SEC is proposing that the company provide additional information, under the caption “Climate-Related Disclosure,” including the identity of the attestation provider, the standard used, the level and scope of assurance and the result, whether there are business relations that could impair independence and any applicable oversight inspection program.


Cydney Posner

Posted by Cooley