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Unpacking implications of the SEC's proposed climate disclosure rule

Listen: Unpacking implications of the SEC's proposed climate disclosure rule

The U.S. Securities and Exchange Commission recently unveiled a long-anticipated climate disclosure rulemaking proposal. The proposed rule, which is now open for comment, would require companies to disclose certain climate-related information ranging from greenhouse gas emissions to expected climate risks to transition plans.

In this episode of ESG Insider, we explore the potentially wide-reaching implications for investors, companies and for climate disclosure globally.

To help us understand the SEC's proposal as it relates to audit and attestation requirements, we talk with Maura Hodge, who is IMPACT and ESG Audit Leader at professional services firm KPMG. We also learn about the challenges of measuring Scope 3 indirect emissions from our colleague Dr. James Salo, who heads environmental research & ESG modeling at S&P Global Sustainable1.

And to explore legal implications surrounding the proposal, we talk with Mellissa Duru, special counsel at law firm Covington & Burling and co-vice chair of the firm's ESG practice. Mellissa previously worked at the SEC in its Corporate Finance Division and as a lead adviser to former Commissioner Kara Stein on the SEC's ESG-related regulatory policy.

We'd love to hear from you. To give us feedback on this episode or share ideas for future episodes, please contact hosts Lindsey Hall (lindsey.hall@spglobal.com) and Esther Whieldon (esther.whieldon@spglobal.com).

Transcript provided by Kensho.

Lindsey Hall:  Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon:  And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall:  Welcome ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Today, we're talking about a topic that's getting a lot of attention across the ESG world. The U.S. Securities and Exchange Commission in March 2022 unveiled a long-anticipated climate disclosure rule-making proposal. And the proposed rule, which is now open for comment, would require companies to disclose certain climate-related information. That's ranging from greenhouse gas emissions to expected climate risks to transition plans. And this is a big topic. So today, we're bringing you a longer episode than normal as we dig in with 3 different experts. And as we'll hear, the rule could have wide-reaching implications for investors and companies and for climate disclosure on a global scale.

Now in the proposed rule, the SEC noted that institutional investors are increasingly asking companies to provide more consistent, comparable and reliable information on climate change risks and impacts. And investors say they need this data to make informed investment decisions. And we've covered this rising investor pressure quite a bit already on this podcast.

So Esther, before we introduce our experts for the episode, can you give us a quick primer on key takeaways or key components of the rule?

Esther Whieldon:  Sure. So the rule draws on the voluntary framework created by the Task Force on Climate-Related Financial Disclosures, or TCFD. The SEC would have companies talk about their climate-related governance practices, expected risks and transition strategies. Companies would also explain precisely how they plan to achieve both short- and long-term decarbonization targets if they have set those.

The SEC would also have companies disclose how climate change is already affecting their bottom line. So for example, they would have to detail the financial costs of a hurricane or wildfire to their company's assets or operations.

The agency would also have companies of all sizes disclose their direct Scope 1 greenhouse gas emissions and companies would also report Scope 2 indirect emissions, which are primarily derived from purchased energy.

The proposal also sets some conditions under which companies would have to disclose Scope 3 emissions. As a reminder, Scope 3 emissions occur up and down a company's supply chain as well as when customers use the company's product.

So first of all, Scope 3 emissions requirements would apply only to larger companies. And those companies would have to provide figures if they have either one, set a decarbonization target that includes Scope 3 emissions or two, if Scope 3 emissions are material to their operations and financial performance. For Scopes 1 and 2 emissions disclosures, the SEC would also phase in their requirement to have companies include something called an attestation report from an independent attestation service provider.

Lastly, the SEC would give companies a safe harbor, i.e., protection from lawsuits for any forward-looking statements as well as for reported Scope 3 emissions.

Lindsey Hall:  Needless to say, there is a lot to unpack here. And to help us under the SEC's proposal as it relates to audit and attestation requirements including what those terms actually mean, we'll be hearing from Maura Hodge. She is an ESG Audit Leader at the firm KPMG.

We'll also learn about the challenges of measuring Scope 3 indirect emissions from our colleague, Dr. James Salo, who heads environmental research and ESG Modeling at S&P Global Sustainable1.

And to understand implications of important legal questions in the rule, we'll hear from Mellissa Duru. Mellissa is special counsel at the law firm, Covington & Burling, and she's also co-Vice Chair of the firm's ESG practice. She previously worked at the SEC, specifically in its Corporate Finance Division and also as a lead adviser on ESG issues to former Commissioner Kara Stein.

Esther Whieldon:  So let's start off with my discussion with Mellissa about a core concept underpinning the rule and really, the SEC's broader authority to require corporate financial disclosures in general.

This core concept I'm referring to is something called materiality. For the purposes of this rule-making, the SEC wants companies to disclose climate-related risks that are reasonably likely to have a material impact on their business, results of operations or financial condition.

And it turns out the legal precedent underlying what counts as material dates back to a U.S. Supreme Court decision in 1976 titled TSC Industries v. Northway.

By the way, later on, you'll hear Mellissa refer to the EU's CSRD that stands for the Corporate Sustainability Reporting Directive.

Esther Whieldon:  Okay, let's turn to my discussion with Mellissa about this issue of materiality. So I heard both Hester Peirce and the Republican Commissioner who opposed the rule as well as the Democrat commissioners who back the rule vote in favor of the proposed rule, I heard both of them mention the Supreme Court's interpretation of materiality, right? It's both of their evidence. Can you talk to me about sort of the precedent that's been referred to here and how that involves the question around the SEC's jurisdiction in this area for this rule?

Mellissa Duru:  So that's an excellent observation, Esther, and it really is at the core of most of the controversy in this rule, which is what is material? What should be deemed material, given the precedent, the Supreme Court law precedent?

Under U.S. securities law principles, the Supreme Court precedent that both the Democrat and Republican commissioners mentioned is TSC versus Northway. And that was a seminal case in which the Supreme Court articulated how one should assess materiality. And at the core of the assessment is this reasonable investor.

So the Supreme Court law precedent basically says that if there is a substantial likelihood that a reasonable investor, given the total mix of information before him or her would deem a particular event or item to be important to their investment or voting decision, then that item should be considered material. And it's important to understand what the total mix of information concept that is embedded in that precedent means.

Total mix considers information that would look to the likelihood or the probability that a particular event will occur as well as the magnitude of impact on company if that particular event were to occur. And so it truly is a total mix of information.

Another important part of that definition or precedent is this notion that's tied to the substantial likelihood that are reasonable investor would deem it important. It's not just that they might deem it important, but rather that it's a substantial likelihood, again, given the total mix that this information would be relevant.

And this is where there's divergence. And I personally, the reason for the divergence when looking at that precedent is on who the reasonable investor is. So the reasonable investor is not this static straw person, right? They have evolved. The reasonable investor is institutional investors that are acting as fiduciaries for their clients' investments. And the reasonable investor are those very same institutional investors that have been stating how they are using key performance indicators, i.e., financial metrics, not just financial metrics, rather, but climate-related metrics, how they're using and tying those metrics to predictive models on how they're going to make out in terms of their returns on investment. That's the reasonable investor.

That reasonable investor is now capable because of advances in technology and data aggregation and data analytics. They're actually able to more effectively link certain types of metrics to certain types of predictive models and outcomes. And so the reasonable investor's assessment of whether a particular item or particular information substantially would impact their investment decision or voting decision is an item or an assessment that does not remain static.

That's where we see the rubber hitting the road. There are some that don't believe the investor is really encompassed by some of what we've seen in terms of institutional investors. And what they have said clearly are material decision-useful metrics, decision-useful disclosures. Others view the investor as some type of investor, maybe typical retail mom-and-pop investor and are scratching their heads at the level of and amount of disclosures that are being labeled as material.

Esther Whieldon:  The debate on materiality, to what extent does it come down to also a question about believing or disagreeing, maybe believing is the wrong word, but a disagreement over whether climate change is actually causing a material risk to companies?

Mellissa Duru:  That's an excellent question. I do think that embedded in most of these materiality discussions on any ESG topic is this notion of whether in substance, the particular topic is material to the financial outcomes. And whether in this circumstance, climate change can be, from a materiality perspective, impactful or truly important and affect financial outcomes.

And I think you have to, again, take a step back and just recognize where we are in terms of our evolution in thinking about what should be deemed a risk. Our evolution in being able to actually statistically model and tie particular types of risks to particular outcomes. And from that perspective, climate change risk comes with a significant amount, and this is observable, a significant amount of financially impactful consequences if improperly matched.

I think the difficulty is figuring out all of the various risks that fall under the umbrella of climate change relatable or attributable, and the difficulty and where we will need to perhaps gather more information, the difficulty is in linking, in statistically significant ways, some of these metrics to financial outcomes that could be material to the bottom line.

So that, I think, in essence, is where a lot of focus will be, but I do think that substantively, there is no longer a significant amount of debate that there is some linkage between climate change, climate change risk, how it's managed and financial outcomes, both on the micro-level and macro-level.

Esther Whieldon:  Were there any questions in the rule that stood out to you as sort of interesting to watch for what the SEC will do with that?

Mellissa Duru:  Yes. There are a few, and one of them really goes to who should be made to follow particular aspects of the rule and/or when the right time should be for application or compliance with the rule.

And so more specifically, there is a question that asked, for example, Scope 1 and Scope 2 disclosures are contemplated by the proposal to be provided by all registrants, irrespective of size. One of the questions is that stood out to me was whether or not this was appropriate or whether they should, in fact, exempt smaller companies, smaller reporting companies from that requirement. That would significantly reduce the overall reach in terms of disclosures that would be forthcoming or required by all of the SEC Exchange Act reporting companies.

The other questions really that stood out are all with respect to the safe harbors and the liability framework that should apply to things such as, for example, Scope 3 emissions to the extent that a company has to provide them because they're material or has -- they've used them in their targets.

There are a variety of ways in which those safe harbor provisions could be adjusted to make them even bigger safe harbor provisions. Right now, the safe harbor provision is premised obviously, on the fact that you have made certain estimates or made certain forward-looking statements, including things like Scope 3 emissions data. You provided them based on reasonable estimates and in good faith, given, again, the difficulty around gathering and properly accounting for Scope 3 emissions, because they are not within the control of the company and are entirely dependent on the informational inputs that a company receives from its upstream and downstream company relationships.

I could see a situation where some will make an argument, companies may make the argument that the reasonable estimate is difficult as a standard to rely on the safe harbor, because how reasonable can an estimate be if you are not able to have a certain amount or level of comfort that the information you're receiving is accurate? And maybe the same will be adjusted to address that particular aspect.

All of this, though, will need to be considered by the SEC in the context of how much reliability does the rule intend or hope to achieve with respect to the disclosures that are being provided. The more broad the safe harbors are, the less liability that attaches to filed information, the less the argument goes, the less discipline, the less rigor, the less consequences there are, and presumably, that will trickle down or affect the reliability of the disclosures which, again, is something that investors have said is extremely important and that SEC always has interest in making sure is as reliable as is reasonably possible.

There is another item or another question as well, and that has to do with this notion of substituted compliance. I found that -- or an alternative reporting provision or requirement. The SEC is behind developments, internationally, on disclosure standards. You have in Europe the EU sustainable finance package and the CSRD. You have this International Sustainability Standards Board that has come up and is in the process of coming up with a climate prototype for disclosures. Also aligned with the TCFD as is this proposed rule, but that goes a little further.

And what the SEC has asked is whether companies that are aligning with any other jurisdictions reporting framework, whether they should consider certain jurisdictions, disclosure frameworks to be substantially compliant with the proposed rules framework for disclosure. And so again, this is a concept that is in the securities laws generally, but there is this kind of mutual recognition of other foreign jurisdictions' requirements if they meet or are substantially similar to the U.S. SEC analogous provision or rules.

So I thought that was very important, just given where we are globally on disclosure around climate-related risks. And given an understanding, again, of these parallel developments and in some ways, developments that are a bit more advanced than the SEC's proposal, developments on disclosure in the EU, the U.K. and other jurisdictions.

Esther Whieldon:  Thank you. Yes. One of the things that came to mind when I was listening to the meeting and reading the rule was could the SEC accidentally or unintentionally create a disincentive for companies to set Scope 3 emissions reduction targets by having this, "If you have set the target, then you have to disclose it," requirement?

Mellissa Duru:  That's an excellent question. And I'm sure that some will argue that, that might be an unintended consequence. However, keep in mind that, again, and this goes back to context of how this rule came to be.

The reason why some of these companies have been providing Scope 3 emissions targets is not because of a regulator pressing them but is the direct result of investor engagement. You have institutional investors that manage trillions of assets. These institutional investors have been repeatedly calling for much more robust disclosures, including disclosures of Scope 3 emissions in their quest to understand and use information about how well a particular company is managing their climate-related risk, how well they're truly making progress towards effectively addressing their exposure to climate-related risk.

And so the investors are imposing their own level of discipline, so to speak, on what companies have been voluntarily reporting, including things like their targets, and their emission reductions commitments around Scope 3. So I think irrespective of what the SEC does in this area, a lot of companies are going to still have to face the music, so to speak, because there's a private market ordering that's already in place that is imposing some level of discipline in pushing for greater levels of disclosure around Scope 3 emissions reductions, targets and goals.

Esther Whieldon:  I asked Mellissa whether differences between the SEC's proposal and the EU disclosure rules could result in further fragmentation and less consistent climate-related reporting globally. Here's her reply.

Mellissa Duru:  It may but I think it would be in the opposite direction. I think that the rest of the world and the international disclosure standards that are being discussed and in the process of being rolled out, in particular, the ISSB.

These are farther along in most respects and cover more than where it is likely the proposed rule will end up landing. So the SEC's rule may be and already is, in some respects, lesser than in terms of disclosure than what is already being proposed abroad. And so the SEC a deeming particular jurisdiction's reporting framework to be substantially compliant. It would only mean that from the U.S. investor side, they would be getting more information than what they currently get if it was a domestic U.S. reporting company. I could see that happening.

But you are right, it would potentially, depending on, again, how much of this proposed rule ends up moving forward and how much of it gets called back. It could result, in some degree, of fragmentation. If Scope 1 and Scope 2 emissions and Scope 3 emissions are completely out, let's say, in a final rule. And everywhere else in the rest of the world, they're being provided, then investors are going to be left with somewhat of a mixed bag in terms of useful -- decision-useful information across a swath of companies for them to compare because U.S. reporting companies would not be providing as much as, let's say, their foreign counterparts. It depends, I think, a lot on where this proposed rule lands and how much of it is retained or how much of it is expanded. We shall see.

Esther Whieldon:  So as Mellissa said, the SEC's rule as proposed may not result in more disclosure fragmentation on a global scale. But the extent to which that remains true will ultimately depend on what the SEC does in final rule.

Now let's turn to my discussion with Maura to understand what role auditors will play in these climate disclosures and the difference between attestation reports and audit requirements. Here she is explaining how KPMG is helping companies report on ESG issues, such as climate change.

Maura Hodge:  So at KPMG, we believe that every company has an ESG story to tell. And we've been working with them over the years as we understand whether it's been brand-defining for them or if they just consider it as woven into the fabric of the company themselves.

And so, we are working with them and walking alongside of them as they go through their ESG journey. Part of it is helping them understand the strategy that they have undertaken or potentially even helping them build out that strategy. And then following on with the reporting component and understanding how they can use reporting to tell their story about all of the things that they're doing.

Esther Whieldon:  And so in the context of the ESG space, why does auditing or independent verification matter? And when might it be needed?

Maura Hodge:  So what we're seeing from the SEC rules and the importance of these rules is that looking for consistent, comparable and reliable and, therefore, decision-useful information to investors. So the role of the auditor in this is to help make sure that companies are disclosing what they're doing and then showing that the information that they're preparing and that they are disclosing is consistent with the rules that have been laid out or the standards that they say that they're following.

Esther Whieldon:  I ask Maura whether we might see companies report something different under the SEC rule than they are currently providing in voluntary climate and sustainability reports. You'll hear Maura mention the term SOX. Here she is referring to the Sarbanes-Oxley Act of 2002.

Maura Hodge:  The information should not be different from what they put in a sustainability report. But what I would say is that the SEC proposed rules, the scope of them are very narrow compared to what we often see in sustainability reports. So the history, and many sustainability reports have been compiled and presented in the context of consideration of stakeholder materiality. So these reports are meant to speak to a broad audience. It would include customers, employees, potentially NGOs as well as investors. So there is a lot of information in sustainability reports that may not be specifically prepared for investors. As a result, what the SEC has done is they've effectively put a box around the issues that they believe are most investor-useful. And really, I think that comes from the calls from investors asking for additional information.

So we know that the SEC, on Monday, March 21, issued their climate-related disclosure proposals. But the week before that, they had issued rules around or proposals around cybersecurity. And we also anticipate seeing some rules coming out to enhance the human capital-related disclosure as well as required disclosure of Board diversity. And so those are 4 topics, but many sustainability reports also pull in a number of other topics that sit outside of those 4 major areas.

So sometimes companies will talk about their impact on biodiversity or the concept of circular economy or they're looking at impacts that maybe are broader than what investors are currently calling for companies to report on. So the topical area is a little bit different from what's in sustainability reports versus what will come into 10-Ks. And then the actual data or information itself should be the same underneath each of those topics.

Esther Whieldon:  So I heard sort of two terms mentioned [ with ]regard to external verification, right? I heard audited and attestation. So what's the difference between an information that's been audited versus comes with an attestation report?

Maura Hodge:  So the primary difference is where information sits. Historically, financial statement information is subject to audit and both audit of the numbers themselves as well as audit of the internal controls over that financial reporting. So that internal control of our financial reporting audit piece came into play with SOX back in the early 2000s.

So the financial metrics that are being proposed by the rule will sit inside of the financial statements as a separate footnote or as a new footnote. And as a result of that, they will be subject to the same audit procedures that companies have been subject to for as long as we've been doing financial statement audits.

Separate from that is the attestation word. And another terminology for that or maybe the more common term globally is assurance. And that will be specifically related to greenhouse gas emissions or what we've historically seen or thought about as nonfinancial information.

So assurance, there are 2 levels of assurance that are being proposed in the rule. The first is limited assurance. Limited assurance is more like a quarterly review of financial information. So when your auditors come in, they perform analytical procedures. They make inquiries. They understand any material changes quarter-over-quarter or year-over-year, and they're looking for anything that would indicate a material misstatement. So the outcome or the output of that is typically a conclusion that states nothing has come to our attention that this data is materially misstated.

Moving into reasonable assurance, that is more like a financial statement audit or what companies experience at the end of the year in conjunction with their 10-K. So when applied to greenhouse gas emissions, what it really translates into is an audit opinion that states this data is not materially misstated. Some of the procedures that we perform in order to come to that conclusion are more extensive than what you would normally do in a limited assurance engagement. So for example, we would be picking and selecting statistical samples of invoices to prove that the information and the consumption that's into the calculation of greenhouse gas emissions is complete. So it could be anywhere from 5 invoices up to, let's say, 100 invoices depending on the size of the company. So you really just need to have access to all of that supporting documentation.

Esther Whieldon:  Okay. Well, I think we covered just about everything. Was there any aspect you wanted to get to?

Maura Hodge:  I think just as a closing point, one of the things that we hear a lot from our clients is just how extensive this is and how much information is required and how much work it's going to be. And I think it's easy to get into that compliance mindset of we just need to do this because the SEC is requiring it. But what we really encourage companies to think about is how they can use this as a way to set themselves apart, to tell their story in the way that they want to tell it and really use this as a competitive advantage. I think by being silent on certain issues and silent on how management is thinking about climate risk will send a message to investors just as loud as a story about how you are incorporating climate risk into your decision-making and into your strategy going forward in the future.

And so I think it's just really important not to fall only into focus on compliance, but really think about how you can use this to drive value and improve your valuation over time.

Esther Whieldon:  We just heard Maura suggest that companies should think of the SEC rule-making as an opportunity rather than simply as a compliance practice. I'd like to turn now to one compliance aspect of the rule that could use more exploring, that's Scope 3 emissions disclosures.

In the rule, the SEC suggested it is requiring only big companies to report on Scope 3 emissions because they may be harder to measure. But what makes them so challenging to calculate? Well, for this answer, let's turn to my colleague, Jamie Salo.

James Salo:  So Esther, they're hard to track in part because Scope 3 emissions are, in fact, all the remaining greenhouse gas emissions the company's responsible for. What this actually means is there are about 15 categories of Scope 3 emissions, 8 upstream categories and 7 downstream categories, plus an additional 2 placeholder for any other indirect emissions from a company's upstream or downstream sources that aren't accounted for in those 15 categories. That's 1 key way that it's more complicated is just that there's actually a variety of different types of Scope 3 emissions.

The second is that they are -- also require more information. For Scope 1, you may be able to just look at the amount of fossil fuel consumption with your operations or the amount of refrigerant gas leakage that you have.

For Scope 3 emissions, you may have to look at all of your purchased goods and services and account for everything and the associated emission with those purchases. Or another example would be highlighting additional information of financed emissions. You may have to account for all of the different investments that you have through your investments in lending and then all the greenhouse gas emissions associated with each of those investments.

Esther Whieldon:  And so if I'm understanding right then, it may be for specific companies, all 15 may not apply to them, right? It may be a very small portion or not enough to worry about depending on sort of what their business model is.

James Salo:  Absolutely. So for an example, something like franchises may not be relevant for every organization but something like purchased goods and services will almost universally be applicable.

Esther Whieldon:  Do you have a sense, in Trucost, you deal with a lot of data coming in and looking at a lot of public sources, too. And do you have a sense for how good disclosures are currently with the Scope 3 emissions?

James Salo:  They've been improving. They lag behind Scope 1 and Scope 2 disclosures considerably. And the other thing that lacks right now is completeness. So whereas you have -- you're seeing an increased number of companies disclosing, for example, their purchased goods and service information or Scope 3 information around their purchased goods and services, very few do so in a comprehensive way. So you may be getting information on your top 50, top 100 suppliers, that doesn't tell you the full picture across all of the purchased goods and services that you have or maybe not even the majority.

Esther Whieldon:  Jamie also had an interesting observation about how the SEC is treating the issue of materiality when it comes to Scope 3 disclosures.

James Salo:  I think that the language around materiality that the proposed rule from the SEC rules has really gives quite a bit -- they're pointing directionally at what they're hoping to achieve. They say things like that organizations should consider whether Scope 3 emissions make up a relatively significant proportion of their overall greenhouse gas emissions. They explicitly say they're not proposing a quantitative threshold, but they do note that a number of companies use thresholds like 40% when assessing the materiality of their Scope 3 emissions, meaning that if you have -- if 40% of the emissions overall that you have across Scope 1, and Scope 2 and Scope 3 come from Scope 3, you should be considering that Scope 3 proportion material. So I think that they are sending signals towards that more companies should be reporting on Scope 3.

One other thing about Scope 3 and materiality is that the rule also suggests that if a company determines that the Scope 3 emissions are not material and therefore, they would not be subject to disclosing them, it may also be useful for investors to understand the basis for that determination, which I thought was a very interesting and noteworthy part of the proposed rule.

Esther Whieldon:  It reminds me sort of the Nasdaq Board Diversity Rule where it's like comply or explain, right? Like if you can't -- if you decide not to do it, explain your reasoning. It sounds like that's sort of what the SEC is doing here as well.

James Salo:  That's what it sounded like to me, too, is that comply or explain principle.

Esther Whieldon:  Yes. Written a little differently, but yes, in concept.

The other thing that occurred to me is we know that SEC is trying to make some exceptions for smaller companies just to reduce the burden on them. But one of the big exceptions is in Scope 3 when it comes to these disclosures. And given the challenge bigger companies already have in getting Scope 3 information from their suppliers, I also wondered whether the SEC's decision to exclude smaller companies from this third scope disclosure would actually make it harder for bigger companies to know their -- the information they would need to report it.

James Salo:  I don't know that it would really make it harder. So if you're getting the Scope 1 and Scope 2 emissions from smaller companies, that maybe the majority of their emissions are actually coming from manufacturing or coming -- so it's actually coming from their Scope 1 and Scope 2, you still may be getting a large piece of the puzzle. Of course, it would be nice to -- from a completeness perspective, to have Scope 3 emissions for those smaller or private companies also. But I think that from a significance perspective, having the Scope 1 and Scope 2 for those smaller private companies is a big step towards having a really much more robust accounting of larger public companies' Scope 3 emissions.

Esther Whieldon:  Yes. And I see what you're saying. That makes sense because really, the companies are looking for the Scope 1 and 2 emissions of their suppliers, not necessarily -- like, when we're talking about corporations that have a supply chain. Where that might be a little different is maybe with investors, right, and their investment portfolio decisions.

James Salo:  Absolutely. Yes. And the investment category is really so interesting and so critical here because for many investment corporations or banks. Finance emissions are going to be far and away the largest component of their greenhouse gas emissions. And so this rule is going to be quite meaningful in working to have more transparency, have more disclosure on the likely greenhouse gas emissions associated with those investments with that -- with those loan books.

It'll provide some challenges for the companies, but the good news is that there are a lot of tools, models and methodologies to help account for these emissions, even in the absence of having detailed disclosures from all of your, let's say, portfolio companies.

Lindsey Hall:  So as we heard from Jamie, Scope 3 emissions are challenging to track, but at the same time, companies have a number of tools, models and methodologies they can use to begin gathering this information.

Esther Whieldon:  I think it's also important to note that we're at the early stages of this SEC rule-making. The SEC is taking comment through May 20, and then we'll have to wait to see what it ultimately decides in the final rule. But that doesn't mean companies should wait until the rule is finalized to start preparing to comply with says Mellissa Duru.

Mellissa Duru:  I think it really means -- and this, I think, is also another item that permeates throughout much of this proposal. It really means that there needs to be greater scrutiny, hopefully, on what is our already in place.

I think where the rubber hits the road for companies and from a governance perspective, companies that have not been paying attention or who have not already been accustomed to corporate sustainability reporting at all. It will mean, for them, a significant ramping up whether it's in the form of committees, whether it's in the form of oversight of what, from a practical perspective and a business level perspective, is being done to properly inventory, properly report and basically build an infrastructure to ensure that all of the various risks are being captured. All of the various risks are subject to a materiality assessment and vetting and that this is getting up through the appropriate channels to the Board, to a particular committee on the Board and to persons that have sufficient expertise to understand what is being reported. It will mean that if you've not been doing it at all, that you will have to start the process of building out even if it's rudimentary, an infrastructure that would enable you to do this.

I think for most companies, particularly the larger companies that are going to be subject to things like the attestation requirement, et cetera, I think lots of companies already have been reporting on a lot of the disclosure that's contemplated in this proposal.

The task now for company management and Boards would be to go through and to really look at what are we already doing and what aspects of this proposal, if they were to be finalized, would be additive to what we're doing. What would we need to incrementally adjust for? And how are you going to uplift your current processes for reporting all of this information in a filed document that's subject to heightened scrutiny and liability. And then being in a position again to document this so that you have in place the information that would be needed to either back up information in a filed report or the information that's needed to effectively and timely report out on climate-related risks that might be disclosable under a final rule.

Esther Whieldon:  So as Mellissa said, companies can start preparing now to comply with the rule. And as we heard earlier in this episode, regardless of what happens with the SEC rule, the horse is already out of the gate on disclosures, so to speak. We have disclosure rules being implemented in Europe and other jurisdictions, plus investor pressure for better quality and consistent disclosures appears likely to continue to grow.

Lindsey Hall:  Please stay tuned as we track the SEC rule-making and the ever-evolving world of investor engagement with companies on climate issues.

Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.