SEC’s Mandatory Climate-Related Disclosures Highlight Need to Harmonize Carbon Accounting Methods

On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules on mandatory climate-related disclosures by companies, including information about climate-related risks that may impact their business, results, or operations, certain climate-related financial statement metrics, and companies’ greenhouse gas (GHG) emissions. Investors and other stakeholders need companies to disclose climate-related information, including on their GHG emissions, in order to understand and assess their risk management and climate mitigation commitments and plans, and accordingly to make informed investment decisions. The SEC’s proposed rules on mandatory climate disclosures are the first step in the right direction. To ensure that disclosures achieve the SEC’s goal of generating “consistent, comparable, and decision-useful” GHG data, the next step will be to harmonize GHG accounting methods.

The rules proposed by the SEC (full text here, fact sheet here) would require companies to disclose information about their direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). Companies—smaller ones exempted—would also be required to disclose emissions from upstream and downstream activities in their value chains (Scope 3) if material or if the company has a Scope 3 emissions target or goal.

The SEC notes that “the proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures [TCFD] and the GHG Protocol.”

Existing GHG accounting methods cannot produce consistent and comparable data

Until the European Union’s (EU) guidance on corporate disclosure of climate-related information and regulation on sustainability-related disclosure in the financial services sector, and now the SEC’s proposed rules, the disclosure ecosystem had been unregulated and voluntary. 

Market-driven frameworks and tools—including CDP, the Global Reporting Initiative (GRI), TCFD, and the Science-Based Targets initiative (SBTi)—have been created to help companies, governments, investors, and other stakeholders better understand GHG emissions. However, these frameworks do not work together, and each company who uses them can do so differently.

Many of them are based on the GHG Protocol. In 2016, 92% of Fortune 500 companies responding to the CDP used the GHG Protocol (directly or indirectly) to measure their carbon emissions. The SEC’s proposed GHG emissions disclosure requirement is also primarily based on the GHG Protocol’s methodology, in light of the SEC’s understanding that “the GHG Protocol’s Corporate Accounting and Reporting Standard provides uniform methods to measure and report [GHG emissions].”

The GHG Protocol covers general elements well, by standardizing the areas on which companies should focus. However, it may not lead to rigorous, comparable disclosures, as it does not standardize how these areas are measured, estimated, or disclosed. 

The GHG Protocol’s Corporate Accounting and Reporting Standard itself clarifies that, while it allows comparisons of a company’s own emissions over time, “it is not designed to support comparisons between companies based on their Scope 3 emissions.” It indicates that “differences in reported emissions may be a result of differences in inventory methodology or differences in company size or structure,” and acknowledges that “additional measures are necessary to enable valid comparisons across companies,” including “consistency in methodology and data used to calculate the inventory,” which sector-specific guidance can help provide.

Reporting companies following the GHG Protocol are not required to disclose how they calculated their emissions estimates, if they measured the data themselves, if they spoke to other companies in their supply chain, or what type of research they did to prepare for their disclosures. Even if disclosures follow the same protocol or framework, they are not comparable. 

While the problem is acute for Scope 1 and 2 emissions, it is even more serious for Scope 3 emissions. There are currently no universal rules for attributing or validating emissions from assets to products, making accountability along supply chain emissions difficult, if not impossible to achieve. As products and emissions become more complex across borders and value chains, companies are strained and challenged to define and account for what emissions they consider relevant at the corporate and product level. 

Each company or industry is left to independently determine how to use frameworks and methods while generalized reporting frameworks do not provide the specific requirements needed for accurate reporting within a specific material supply chain. As a result, companies diverge on what they consider relevant, and thus what they choose to report, and do so without informing or consulting with investors or other stakeholders. 

Thus, relying on the GHG Protocol alone will not suffice to achieve the “consistent, comparable, and decision-useful” GHG data that the SEC seeks to generate.

A harmonized approach to mandatory GHG disclosures is necessary to improve the resilience and profitability of U.S. corporations—and the robustness of information available to investors—especially in the context of growing climate-related risks.

COMET complements and reinforces SEC action on mandatory disclosures 

Launched in Davos in January 2020, the Coalition on Materials Emissions Transparency (COMET)—an initiative between the Columbia Center on Sustainable Investment (CCSI), the Payne Institute for Public Policy at the Colorado School of Mines, RMI, and the Secretariat of the United Nations Framework Convention on Climate Change (UN Climate Change)—is an open, multi-stakeholder initiative to harmonize GHG accounting methods, with a particular focus on mineral and industrial supply chains. It seeks to enable better accounting for emissions in harmony with existing methods and platforms.

More specifically, the COMET Framework will streamline existing accounting and reporting protocols, by bringing together the main GHG emissions standards and protocols, both generic and sector-specific, into an integrated set of guidance documents, built on the principles of the GHG Protocol. It will create effective and actionable “translation tables” between the myriad methodologies, including, for example, the more than 60 methodologies currently accepted by CDP. The COMET Framework will enable harmonization of ways to report Scope 1 and 2 while providing a more practical approach to Scope 3, enabling comparability between disclosures.

Any entity will be able to use the COMET Framework to report to any of the existing platforms, according to any of the existing standards, in a manner that is harmonized and comparable with similar disclosures made by other entities to other platforms. Disclosures made with the “COMET inside” declaration will be universally comparable, and therefore more useful to investors to see where emissions are coming from and how they are managed.

COMET stands ready to work with the SEC as it continues to build up the rules on mandatory climate-related disclosures. Our hope is that the SEC’s regulatory efforts will also lead to a harmonized GHG accounting and reporting method capable of generating consistent, comparable, and decision-useful data on GHG emissions for investors as well as other stakeholders, including governments, companies, financial institutions, and consumers.

For questions on the COMET initiative and on the need to harmonize carbon accounting methods for the SEC's climate disclosure rules to succeed, you may contact CCSI's Perrine Toledano (Head: Mining & Energy) or Martin Dietrich Brauch (Senior Legal and Economics Researcher).