Struggling to Scope

by | Mar 25, 2024 | Climate Risk, Risk Report | 0 comments

Team Regulator is taking some hits on the chin right now.

A few weeks ago, the SEC adopted the final rules for climate disclosure. These rules have been underway for two years and came out less comprehensive than desired due to a solid pushback from Team Business.

Companies will be required to disclose emissions that come directly from their own operations, known as Scope 1, and emissions that stem from their energy purchases, known as Scope 2, but not, as proposed, the indirect emissions from their supply chain or customers’ use of their products, known as Scope 3. And Scope 1 and 2 emissions only have to be disclosed if they are deemed of material interest to investors.    

It is estimated that Scope 3 emissions make up 70% of the greenhouse gases (GHG) from business in general and 95% of the emissions from banking activity.

Furthermore, Team Business has to disclose climate-related (physical) risks that have had and are reasonably likely to have a material impact on their bottom line as well as steps taken to mitigate those risks and any losses from severe weather.

The editors of this fine paper are concerned that it might be reasonably likely that the distribution of outcomes from a materiality determination in some cases could skew to the side of immaterial, but that probability is of course based on an estimate and has a margin of uncertainty, too.       

The largest companies will—if they find it relevant—start disclosing in 2026, large companies will follow along in 2027, and some smaller companies in 2027/2028.  

However, for those who like to snoop around in disclosed emissions, all is not lost. The SEC rules only apply to companies registered in the US, and other countries, such as the 27 EU countries, the United Kingdom, and Singapore, as well as California, have much stricter rules that include Scope 3 emissions and go into effect much sooner.

And subsidiaries of US companies that are registered on exchanges in these countries will have to abide by the rules which has caused some of them to frantically hit the DELIST button.

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.


For more information on materiality and climate risk, read our “Climate Risk in Banking” white paper.