Stavros Gadinis (University of California, Berkeley - School of Law) has posted Dissonance in Climate Disclosure: the SEC, EU, California, and ISSB Regimes on SSRN. Here is the abstract:
In the last few years, most major financial centers adopted rules on climate disclosure. But for all the swift action taken by policymakers, their approach has been far from uniform. A particularly thorny question relates to mandatory disclosure of greenhouse gas emissions, especially indirect Scope 3 emissions occurring throughout a company’s value chain. The EU forged ahead by requiring Scope 3 disclosures in 2021. The SEC followed with a related proposal in 2022, receiving an overwhelming wave of commentary both for and against the proposal, with many negative views focusing on the Scope 3 mandate. While the SEC pondered its reaction, California moved ahead in late 2023 by introducing a Scope 3 mandate, effectively capturing many U.S. companies doing business in the state. Finally, the SEC axed the Scope 3 mandate from the final rule it adopted in 2024. Scope 3 disclosure mandates are absent from the ISSB framework, a private set of standards used by many companies voluntarily and adopted or considered as a template in many other jurisdictions, such as Brazil, Canada, Japan, and Australia.
To better understand the controversy, this essay begins by exploring the challenges associated with Scope 3 disclosure. The difficulties of obtaining accurate measurements are compounded by the lack of standardized methodologies. Various stakeholders have raised concerns regarding the costs of compliance, the reliability of data, and the potential for misaligned incentives that may divert resources from actual emissions reductions. The essay then analyzes the key differences among different regulatory approaches, such as the SEC's decision to remove Scope 3 emissions from its final rule, the EU's more comprehensive framework, California's ambitious laws, and the ISSB's focus on financial materiality.
The comparative analysis reveals the tradeoffs associated with mandatory Scope 3 disclosures. While companies may disclose Scope 3 emissions as broad indications of their footprint, these are based on estimates and methodologies generally regarded as inconsistent and leaving a lot of discretion to the reporting company. As a result, it is not clear whether mandatory disclosure alone would succeed in producing data that is comparable among companies and industries. European policymakers have set up an institutional infrastructure designed to support companies as they are developing their Scope 3 disclosures by issuing guidance and streamlining reporting quandaries. In the U.S., where this institutional infrastructure is lacking and the risk of securities litigation looming over reporting companies is heightened, the stakes of getting reports right would be much higher.
