On Monday the SEC released its long-awaited proposed rule changes that will require disclosure of climate-related risks that are reasonably likely to have a material impact on registrants. As noted in its press release, the SEC has focused on climate-specific rules in order to “provide investors with consistent, comparable and decision-useful information for making their investment decisions.”  In sum, the Proposed Rule would require listed companies to disclose information in four key areas: (1) governance  — how is the board and management set up to evaluate and monitor a registrant’s climate-related risks, (2) strategy, business model and outlook  — how do climate-related risks materially impact the registrant, (3) risk management  — how does the registrant identify, assess and manage climate-related risks, and (4) Greenhouse gas (“GHG”) emissions metrics  — what are registrants’ Scope 1, Scope 2 and Scope 3 GHG emissions. 

Scope 1 and Scope 2 emissions are tied to companies’ direct and indirect emissions linked to operations and energy purchases, whereas Scope 3 emissions are all other indirect emissions that are generated from sources that are neither owned nor controlled by the company but are nonetheless a consequence of the company’s activities (e.g., emissions linked to the company’s supply chain). The rule sets out detailed considerations under each of these areas and also establishes attestation requirements (i.e., an attestation report from an independent attestation provider, which would provide an “additional degree of reliability” about greenhouse gas emissions and the “key assumptions” and data figures used) for any GHG emissions or other metrics that are disclosed.

The SEC clearly anticipates that the climate-related risks to a registrant’s supply chain must be evaluated and disclosed where material.  Consistent with its 2010 guidance, risks could include impacts from climate-related events, such as severe weather negatively affecting a registrant’s supply chain by causing higher input costs or delayed product deliveries.  The Proposed Rule expressly includes consideration of a registrant’s “suppliers and other parties in its value chain” when considering the actual and potential impacts of climate-related risks on the registrant’s strategy, business model and outlook.

Importantly for companies with global supply and value chains, the SEC recognizes the difficulty that currently exists for many registrants because of a lack of data in evaluating Scope 3 GHG emissions, i.e., 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.  To that end, disclosure of Scope 3 emissions is not in all cases mandatory.  Registrants are required to disclose Scope 3 emissions only if they are material (if there is a substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision) or the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.  Moreover, recognizing the complexity related to measuring Scope 3 GHG emissions, the Proposed Rule includes a safe harbor for Scope 3 emissions disclosure from certain forms of liability under the Federal securities laws, an exemption for smaller reporting companies from the Scope 3 emissions disclosure provision, and a delayed compliance date for Scope 3 emissions disclosure.

Key Takeaways

We will post more details on the Proposed Rule and its potential impact in the coming days.  In the interim, the Proposed Rule represents a set of compromises made between a faction within the SEC that sought more rigorous disclosure requirements and those who wanted to ensure that the Proposed Rule survives legal scrutiny by federal courts in the wake of the legal challenges by industry, environmental and other interested groups. The materiality threshold, safe harbor, smaller company exemption and phase-in period for Scope 3 emissions requirements most clearly show the compromise. 

Scope 3 emissions are also the most critical for companies with complex and extended supply chains to address; therefore, while there are limitations on the disclosures required with respect to these impacts, companies should be preparing now to ensure they are able to meet the coming requirements.  Responsible sourcing programs must appropriately cover the relevant metrics needed for compliance.  In addition, companies should have claims vetting processes in place to ensure that public statements and future disclosures under the SEC rule are accurate and achievable, minimizing the risk of litigation over inaccurate targets, goals or achievements.

Next Steps

The SEC is seeking comments on the Proposed Rule within 30 days of its release.  . Comments can be submitted online at SEC.gov | How to Submit Comments within 30 days of the Proposed Rule being published in the Federal Register.  Companies with global supply chains should consider taking advantage of this opportunity to have a voice in SEC disclosure rulemaking by sharing their comments. 

Below are just a few of SEC’s supply chain related requests for comments where input from multinational companies would be helpful:

  1. Should we require a registrant to disclose climate-related impacts on, or any resulting significant changes made to, its products or services, supply chain or value chain, activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes, expenditure for research and development, and any other significant changes or impacts, as proposed? Are there any other aspects of a registrant’s business operations, strategy, or business model that we should specify as being subject to this disclosure requirement to the extent they may be impacted by climate-related factors?
  2. Should we require a registrant to disclose its Scope 3 emissions for the fiscal year if material, as proposed? Should we instead require the disclosure of Scope 3 emissions for all registrants, regardless of materiality? Should we use a quantitative threshold, such as a percentage of total GHG emissions (e.g., 25%, 40%, 50%) to require the disclosure of Scope 3 emissions? If so, is there any data supporting the use of a particular percentage threshold? Should we require registrants in particular industries, for which Scope 3 emissions are a high percentage of total GHG emissions, to disclose Scope 3 emissions?
  3. Should we require a registrant that has made a GHG emissions reduction commitment
    that includes Scope 3 emissions to disclose its Scope 3 emissions, as proposed? Should we instead require registrants that have made any GHG emissions reduction commitments, even if those commitments do not extend to Scope 3, to disclose their Scope 3 emissions? Should we only require Scope 3 emissions disclosure if a registrant has made a GHG emissions reduction commitment that includes Scope 3 emissions?
  4. Should Scope 3 emissions disclosure be voluntary? Should we require Scope 3
    emissions disclosure in stages, e.g., requiring qualitative disclosure of a registrant’s significant categories of upstream and downstream activities that generate Scope 3 emissions upon effectiveness of the proposed rules, and requiring quantitative disclosure of a registrant’s Scope 3 emissions at a later date? If so, when should we require quantitative disclosure of a registrant’s Scope 3 emissions?
  5. Should we require a registrant that is required to disclose its Scope 3 emissions to
    describe the data sources used to calculate the Scope 3 emissions, as proposed? Should we require the proposed description to include the use of: (i) emissions reported by parties in the registrant’s value chain, and whether such reports were verified or unverified; (ii) data concerning specific activities, as reported by parties in the registrant’s value chain; and (iii) data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data, as proposed? Are there other sources of data for Scope 3 emissions the use of which we should specifically require to be disclosed? For purposes of our
    disclosure requirement, should we exclude or prohibit the use of any of the proposed specified data sources when calculating Scope 3 emissions and, if so, which ones?

Reagan Demas has significant experience working on behalf of companies and investors in emerging markets and high risk jurisdictions. He has managed major legal compliance investigations for a variety of Fortune 500 companies and negotiated settlements before the US Department of Justice, US Securities and Exchange Commission, and other federal and state regulatory entities, obtaining declinations in a number of matters. He has also conducted risk assessments and due diligence in a variety of legal compliance matters for companies across industries, and has worked on the ground evaluating partnerships, investments and other business opportunities worldwide. Reagan has written and spoken extensively on corruption, business ethics, human rights-related legal obligations and emerging regulatory regimes.


Doug Sanders leads Baker & McKenzie's US Environmental Litigation practice. He represents a broad range of domestic and non-US corporations before federal, state and administrative courts in environmental, class action, mass tort and product liability litigation, government enforcement, permitting and criminal proceedings.


Maria Piontkovska advises clients on reducing anti-corruption compliance risks stemming from operating business in emerging markets and handles internal investigations and related interactions with law enforcement authorities. Her practice focuses on global corporate compliance and investigations, as well as white collar criminal matters. She represents domestic and international corporate clients in a broad range of compliance matters, including criminal investigations, before the US Department of Justice, the US Securities and Exchange Commission, and other government agencies.