How the SEC’s rules will – and won’t – solve climate change 

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Guest Author

Alicia Seiger

Guest Author

Marc Roston

Guest Author

Thomas Heller

The U.S. Securities and Exchange Commission has proposed landmark climate-related disclosure requirements for public companies to inform investors about the risks a changing climate poses to firms. 

The upside? The SEC went big. Access to consistent and comparable climate data may result in more capital to companies reducing harmful emissions and increasing climate resilience. 

The proposed rule fully embraces the Task Force on Climate-related Financial Disclosures, or TCFD, framework, a tool already in widespread use among financial regulators and institutions in Europe and Asia. 

The rule would require registrants to disclose governance, strategy, risk management, and metrics aligned with and informed by science. It also attends to physical risks, scenarios, the use of offsets, assurances and specifics of greenhouse gas emissions calculations (i.e., absolute and intensity metrics.) Finally, it requires firms with publicly stated climate-related goals to disclose transition plans and targets. This ‘truth in advertising’ feature shifts voluntary corporate pledges to disclosed obligations. 

Advocates are celebrating. But while three-quarters of respondents to the SEC’s request for comment on the rule voiced support for mandatory climate disclosures, tensions over where to draw lines still loom large. Perhaps the biggest battle is over whether companies should disclose the emissions of upstream and downstream value chains, so-called Scope 3 emissions. 

Scope 3’s unrealized ambitions

The SEC has proposed requiring registrants to disclose Scope 3 emissions “if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.” The inclusion is a big win for advocates who argue that measuring and managing Scope 3 is essential for driving emissions to Net Zero by 2050 – the path to targets set in 2015 Paris Agreement. 

Mandatory Scope 3 reporting sounds good, but it may not “do” good. Scope 3 targets, measurement and goals may simply disappear from corporate plans to avoid legal arm-wrestling over compliance. More importantly, Scope 3 suffers from ambiguity, overcounting, and gaming, each of which leads to a false sense of progress. 

These weaknesses make mandatory Scope 3 ripe for legal challenges by those who want climate policy to remain in legislative hands. Alternatively, climate disclosure rules without Scope 3, implemented correctly and understood fully, can still be highly effective. 

Scope 3 has risen to prominence on the promises of improving risk management, driving carbon markets and expanding carbon accounting. A sober assessment of Scope 3’s progress against these hopes would see mostly unrealized dreams. The good news is that we see more grounded and effective pathways on the horizon. 

Let us explain. 

The “scopes” began as a risk management tool to evaluate impending global carbon pricing. In that context, Scope 3 reflected second-order, nice-to-understand risk.  As we argue in our book Settling Climate Accounts, Navigating the Road to Net Zero, companies easily game Scope 3 calculations, working around supply chain boundaries or national borders, thereby limiting the value of Scope 3 as a tool for risk measurement at the firm level. 

Gaming Scope 3 emissions doesn’t just limit its value as a tool for firm-level risk. It also obscures the bigger picture. The shift of public oil and gas assets into private equity and sovereign funds hide emissions in financial shadows. Buyers of dirty assets face limited or no pressure on their carbon accounting beyond periodic greenwashing exercises. As unscrupulous buyers and sellers play this game, public Scope 3 ledgers show dramatic greenhouse gas reductions – while the planet continues on a dangerous path.  

Large asset owners, including some U.S. public pension plans, have argued Scope 3 can inform systematic climate risk. The Advisory Group on Climate-Related Risk Disclosure (which one of us co-chaired for the governor of California) recommended that the state require Scope 3 reporting for its procurement and investment portfolio counterparties as a tool in a broader climate policy toolkit. This view, however, falls beyond the SEC’s scope of individual corporate risk disclosure mandates. 

Scope 3 also promised a mechanism for stakeholder engagement. Such a function is especially important in the absence of a global price on carbon. Against this promise, Scope 3 has achieved some measure of success. Stakeholders have employed Scope 3 as a tool for exerting pressure on third parties, up- and downstream. The upstream supply chain focus has had the benefit of spreading carbon consciousness across continents. 

Additionally, Scope 3 attributes household carbon emissions (e.g., autos) to companies (e.g., auto manufacturers and oil majors) who are better equipped to drive carbon reducing investments. These are the leading arguments for Scope 3 in a broader climate policy context. 

Perhaps Scope 3’s biggest false hope was the promise that it would drive meaningful investment in the clean energy transition. Scope 3 accounting has failed to deliver widespread carbon pricing, climate-wise industrial policy, or significant R&D budgets. It has, however, delivered a demand surge for low-cost (and low-quality) offsets to meet targets. Hitting the ‘easy’ button on Scope 3 distracts from the hard work and innovation needed to develop novel energy technology, or deliver high-quality, reliable and innovative offsets. 

Several leading players take real risk, making substantial investments in quality projects and technologies. But even the leaders often only pay up for a small portion of their Scope 3 obligations. The Task Force on Scaling Voluntary Carbon Markets (TSVCM) reports more than two-thirds of offset purchases chase cheap renewable energy credits and avoided deforestation. Such purchases have virtually no impact and in many cases contribute to rising emissions.

New tools

What are better alternatives to Scope 3? We see promise in higher frequency Scope 2 accounting.  Approximately 75% of global emissions come from direct and purchased electricity, heat and transportation (i.e., someone’s Scope 2.) However, GHG Protocol measures Scope 2 on an annual basis. In response, companies generally buy renewable energy credits or offsets when they cannot source clean power. Ideally, Scope 2 should be calculated on a continuous basis. Zeroing out Scope 2 emissions for every electron, every second of every day would have enormous impact without touching Scope 3 calculations. 

This ambitious goal cannot be met in the short run. Firms need decision-making tools to support investments that optimally shift energy production across location and time to achieve this goal most effectively. Big tech companies and some governments are pioneering this work. CRS and WRI have engaged to improve the Scope 2 protocol. We strongly support, and work in partnership with, firms and governments around the world that encourage intelligent tradeoffs between self-interested carbon free energy, and grid adaptation and electricity system improvement for the greater good. 

With the door open for GHG Protocol revisions, stakeholders might consider a dramatic overhaul. Some academics have proposed VAT-like methodologies to track emissions through supply chains. These methods show promise, by throwing out the various Scopes entirely. Perhaps the absence of Scope 3 in the final SEC rule will catalyze much needed reform. 

Even with better emissions accounting, several of Scope 3’s hoped-for benefits will remain unattended. By teasing out those benefits, policymakers, businesses and investors can focus on designing better incentives to drive desired behaviors. The behaviors fall into two categories: driving carbon markets and comprehensive emissions accounting.

Transcendent accounting

Let’s start with carbon markets. The road to net zero needs the Amazon rainforest to stay on the map – the same goes for other critical stores of carbon. Offsets, driven by Scope 3 ledgers, are not fit for this task. Companies and countries need to build better carbon-sink saving mechanisms – time is running out. 

Nor is Scope 3 fit for the purpose of driving investment in hard to abate sectors. Stanford, as well as groups like Mission Possible Partnership are looking forward to technology development, innovation policies and targeted financing mechanisms like pre-competitive demand contracts for this purpose. 

Scope 3 accounting held hope for driving the transfer of capital from advanced economies to emerging markets. Despite early set-backs, efforts like the Just Energy Transition Partnerships with South Africa show promise for the potential for fit-for-purpose solutions to accomplish what Scope 3 could not for emerging markets.

And while Scope 3 promised to enumerate emissions beyond company and country borders, to deliver on comprehensive emission accounting the world needs a transcendent accountant. Effective management of climate change requires a well-kept and closely aligned set of books that accurately, consistently, comparably and authoritatively (and only once) account for all emissions: country and non-state actors, as well as the changing stocks of natural carbon. 

Such properly designed and implemented ledgers to measure, record and regulate planetary emissions have always lain beyond the wildest dreams of Scope 3.

It’s hard to let go of the promise of Scope 3. But there are better paths, if managing climate risk and driving investment in climate resilience are the goals. 


Alicia Seiger is a lecturer at Stanford Law School and leads sustainable finance initiatives at Stanford law and business schools and the Precourt Energy Institute. She co-chaired California’s Climate Risk Disclosure Advisory Group.

Marc Roston is a research fellow at the Steyer-Taylor Center for Energy Policy and Finance, a joint initiative of Stanford law and business schools. He is a contributing author to “Settling Climate Accounts” and has spent more than 25 years in the asset management industry.

Thomas Heller is the Charles and Nadine Shelton Professor of International Legal Studies (emeritus) at Stanford Law School and directs sustainable finance initiatives at Stanford law and business schools and the Precourt Energy Institute. He co-edited “Settling Climate Accounts” and serves as senior director at Willis Towers Watson.