Whither went Scope 3?

The Securities and Exchange Commission (SEC) ended any mystery of whether it would drop a proposed requirement that U.S.-listed companies disclose emissions from their value chain when it finalized its long-awaited climate-disclosure rules on Wednesday.

Nevertheless, investors stand to gain a lot more information, as U.S. companies have some serious catching up to do on the most rudimentary climate risk disclosures.

Though Scope 3 emissions (which comprise the emissions of a company’s suppliers and use of its products by customers) make up the largest share of most companies’ carbon footprint, pushback from several market participants that they’re too difficult to measure ultimately dissuaded the SEC from mandating their disclosure. The decision to leave Scope 3 out of the final rule comes to the disappointment of those who view disclosure of such emissions as a prerequisite for understanding a company’s climate-related risk.

Both concerns are grounded in reality. Scope 3 emissions matter in any understanding of a company’s climate risk and impact.[1] Yet, accounting for them can present challenges for companies given the present reliance on estimation models.

But the bigger point may be that U.S.-listed companies are significantly behind their global peers when disclosing their operational and energy-related GHG emissions, otherwise known as Scopes 1 and 2. The long-awaited rules from the SEC promise to narrow that gap.

U.S.-listed companies represent roughly two-thirds (63%) of the total value of global equity markets. Yet of the nearly 2,400 companies in MSCI’s flagship U.S. index, less than half (45%) disclose their Scope 1 and 2 emissions, compared with nearly three-quarters of listed companies in other developed markets. Twenty-nine percent of U.S.-listed companies disclose some (and not necessarily the most material) Scope 3 emissions, compared with 54% of their global peers.

U.S.-listed companies lag listed firms in other developed markets in disclosing their greenhouse gas emissions

While reporting of value chain (Scope 3) emissions continues to be a topic of contention, more than half (54%) of listed companies in developed markets outside the U.S. report at least some of their Scope 3 emissions, compared with 29% of U.S.-listed firms.

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US companies lag listed firms in other developed markets

Source: MSCI ESG Research, February 15th, 2024

Scope 3 aside, investors stand to have much more information about financially relevant climate risks thanks to the SEC’s ruling. Among other information, the largest U.S. companies will be required to disclose in their registration statements or annual 10-K reports:

  • Material Scope 1 and 2 GHG emissions in absolute terms
  • Exposure to climate-related physical and transition risks that have a material impact on their strategy, operations or financial position, including how the company governs and manages those risks.
  • Information about climate-related targets and goals, as well as the use of transition plans, scenario analysis and internal carbon prices.
  • The financial impact of severe weather events or sea-level rise, including costs related to such events
  • Capitalized costs and other information about the use of carbon credits or renewable energy certificates if used as a material component of a company’s climate plan

To be sure, the rest of the world is charging ahead, with more jurisdictions pushing toward disclosures on climate transition plans and nature-related risks, areas even more nascent and complex to measure than value-chain carbon emissions.

But given the prominent position of U.S. companies in global portfolios, the SEC’s rule is likely to help investors fill the holes in a baseline of information. When it comes to climate disclosure, U.S.-listed firms may need to walk before they run.

[1] Represented by the MSCI ACWI Investable Market Index (IMI), which includes large-, mid- and small-cap listed companies across 23 developed-market and 27 emerging-market countries. With 9,064 constituents, the MSCI ACWI IMI index covers approximately 99% of the global equity investment opportunity set, as of Feb. 29, 2024.