Is the SEC out to put family farmers out of business? I don’t think so. Yet, recent headlines feature backlash from business groups and politicians expressing fear that small businesses - and specifically small farmers - will be unable to do business with public companies if the SEC’s climate proposal is adopted. The concern is laid out in this comment letter to the SEC from a group of Congressional Representatives.  

The argument is worth unpacking because it reflects what I believe to be a misperception about greenhouse gas accounting and the impact the SEC’s proposed rules will have on businesses. The comment letter says: “It is not within the purview of the SEC to regulate farmers and ranchers, which is what this rule would do by requiring public companies to disclose their Scope 3 greenhouse gas (GHG) emissions. To do business with public companies, small farms would be required to disclose a significant amount of climate-related information.” 

The concern appears to be that the SEC proposal would require some public companies to report certain Scope 3 GHG emissions. Scope 3 emissions include emissions associated with activities in a company’s supply chain.  Since family farmers and other small businesses are often part of some public companies’ supply chains, the concern is that those small businesses will be forced to report detailed climate data to enable their public company customers to report their Scope 3 emissions.  

The thing that this argument doesn’t recognize is that public companies don’t have to obtain emissions data directly from all of their suppliers in order to report their Scope 3 emissions. Some food manufacturers have hundreds of thousands of small farms around the world in their supply chains. It would be a monumental feat to get emissions data from all of those suppliers.  

The Greenhouse Gas Protocol acknowledges this issue and states in its Scope 3 Technical Guidance, “collecting data directly from suppliers adds considerable time and cost burden to conducting a scope 3 inventory, so companies should first carry out a screening to prioritize data collection and decide which calculation method is most appropriate to achieve their business goals.” 

One acceptable method to calculate Scope 3 emissions is to use spend-based formulas that multiply the amount of money spent, or the amount of goods purchased, by emissions factors that use industry averages. Companies using this approach would not have to obtain data from their small vendors. 

The SEC’s proposal specifically endorses this as an acceptable methodology: “when calculating Scope 3 emissions from purchased goods or services, a registrant 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).”

Over time, particularly with technology tools that facilitate reporting, more granular supplier data will surely become available. For now, it is important to keep in mind that there are alternative ways for public companies to calculate their carbon footprints that don’t involve putting small businesses out of business. I spoke with  E&E News about this issue last week to try to clear this up. 

Regulatory Developments of the Week

UK Parliament Launches Inquiry into the Financial Sector’s Net Zero Transition

Financial institutions' role in the transition to a low carbon economy has been a hot topic recently. The UK has launched an inquiry to examine the role of the financial sector in the UK's net zero transition. The Environmental Audit Committee will be reviewing the extent to which financial firms are  aligned to help meet the UK Government’s carbon budgets and net zero targets. 

As a part of this inquiry, the Committee will be contacting leading signatories of GFANZ for public statements about their fossil fuel and renewable investment policies, among other topics. Public, written submissions are also welcome for feedback on addressing the sector’s decarbonization efforts and their impacts, of which a full list of the terms of reference can be found here. Rt Hon Philip Dunne MP, Chairman of the Environmental Audit Committee, said, “Mobilising financial institutions to support decarbonisation of the economy, for instance through the work of the Glasgow Financial Alliance for Net Zero, has been a key feature of the UK’s COP presidency. A year on from when Mark Carney launched the GFANZ initiative, our Committee is keen to explore how this work can be most effective at driving down global emissions.”

European Guidance on the Supervision of Sustainable Funds

The European Securities and Markets Authority (ESMA) released a supervisory briefing aimed at combating greenwashing in asset management. ESMA hopes to ensure convergence across the EU in the supervision of investment funds with sustainability features, with guidance for the supervision of fund documentation, marketing materials, sustainability-related terms in funds’ names, and the integration of sustainability risks by fund managers into their portfolios and risk management processes. 

The briefing states, “Sustainability-related disclosures should not include boilerplate language with complex legal disclaimers, nor technical jargon that might not be understood by the average investor.” The clear instruction included by ESMA is a great step toward arming investors with the accurate, and easily understandable information they need. This is also a timely briefing, as in August of this year, EU authorized fund managers will be mandated to integrate sustainability risks into their portfolios and risk processes. This focus on investment funds disclosures reflects like thinking across the pond at the SEC, as I covered last week

France Calls for the Regulation of ESG Data and Ratings 

In May, we saw Britain’s finance ministry and Financial Conduct Authority partner to consider regulating ESG ratings providers. This week, France has echoed these calls in their response to the European Commission’s public consultation on ESG ratings. France’s financial market regulator, The Autorité des marchés financiers (AMF), has issued a statement calling for future regulation to cover not only ESG raters, but also ESG data and services firms. The AMF stresses that the regulation should be centralized at the European level and must prioritize transparency.

  • After the G7’s Climate, Energy and Environment Ministers met in Berlin last week, the group issued a series of commitments focused on decarbonizing their economies and accelerating the pace to global net zero. This year’s meeting of climate officials from G7 countries (the U.S., U.K., Canada, Japan, Germany, France, and Italy) focused on climate change, biodiversity, and pollution as its main themes while discussing the impending energy crisis posed by the Russian invasion of Ukraine. The countries’ decarbonization pledges included commitments to phase out coal and invest in hydrogen and other early-stage renewable energy technologies. [My take: Energy independence, greater global security, and the energy transition are a virtuous cycle.] 

  • Merely eighteen months after its founding, the Net Zero Asset Managers Initiative has surpassed $60 trillion in collective assets under management and 270 funds globally. The initiative represents a group of fund managers committed to bringing their portfolios to net-zero by 2050, advocating for banks and fund managers around the world to reduce their financed emissions footprint. NZAM’s new report indicates that almost 40% of its collective assets under management is currently on target to reach net-zero. [My take: Climate disclosure regulations will foster investor protection, but the financial sector will drive companies to set carbon reduction goals, build strategies, and report their progress.] 

  • New York Governor Kathy Hochul unveiled plans to construct 22 new renewable energy plants in the state as NY aims to reach net-zero emissions by 2040. The new plants, many of which will be solar power plants, will likely generate 4.5 billion megawatt hours of renewable energy each year and help reduce carbon emissions “equivalent to taking over 492,000 cars off the road every year,” according to the governor’s statement. Additionally, the renewable energy plans would create 3,000 jobs and produce over $2.5 billion in new investments in renewable energy. [My take: I’m proud to be a New Yorker.] 

  • President Biden used the Defense Production Act to accelerate domestic clean energy production in the wake of soaring gasoline prices and uncertainty about global energy supply. The presidential orders issued on Monday will allow the federal government to invest directly in companies that produce solar energy, transformers, heat pumps, fuel cells and other energy technologies in order to reduce American dependence on foreign energy sources, stabilize energy supply chains in the U.S., and accelerate the transition to a low-carbon economy. Activists hailed the move as a long-overdue step to confront the climate crisis with investments in solar energy and other renewables, as Democrats in Washington face the prospect that no climate legislation may pass Congress before the November midterms. [

    My take: We need to use  all the tools available to make the clean energy transition, gain energy independence, and bolster our national security, and  economic resilience.]

Read the rest of Kristina's Full Disclosure Newsletter and subscribe here.

Wyatt joined Persefoni from the U.S. Securities & Exchange Commission (SEC), where she served as Senior Counsel for Climate & ESG to the Division of Corporate Finance, led the rulemaking team through drafting proposed climate disclosure regulations, and worked closely with the Office of International Affairs.

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