What the final SEC sustainability reporting rules mean for equipment OEMs

On March 6, the U.S. Securities and Exchange Commission (SEC) announced the adoption of rules it said would bring consistency and reliability to corporate sustainability reporting “while balancing concerns about mitigating the associated costs of the rules.” An initiative two years in the making, the final rules are notable in that Scope 3 greenhouse gas (GHG) emissions reporting, which was part of the SEC’s original proposal, is not mandatory.

Scope 3 emissions are indirect GHG emissions that “are a consequence of the activities of the company but occur from sources not owned or controlled by the company,” according to Greenhouse Gas Protocol’s latest reporting standard. Greenhouse Gas Protocol is an international, multi-stakeholder partnership launched in 1998 to develop GHG accounting and reporting standards. The organization says on its website that it “supplies the world’s most widely used greenhouse gas accounting standards.”

The seal of the U.S. Securities and Exchange Commission (SEC) at its headquarters in Washington, D.C. Photo: Reuters/Andrew Kelly/File Photo

The Associated Press reported that many companies and business groups had strongly opposed Scope 3 reporting, arguing that such reporting would be particularly onerous.

Curt Blades, senior vice president of industry sectors and product leadership for the Association of Equipment Manufacturers, said that many organizations questioned whether the SEC was overreaching its authority in this making Scope 3 reporting mandatory.

“It’s absolutely appropriate to encourage lawmakers and regulators to take a good, hard look at all reporting requirements to make sure that they’re not overly burdensome,” he said. “I think you could say that the Scope 3 requirement — some could argue that it’s burdensome.” Blades added that the proposed timing for compliance, which would have been 2025 for many companies, could be argued as being especially onerous.

“So, by that simple task of removing Scope 3 from the SEC [rule], that’s helpful,” he said. “That’s a bit of a relief.”

The SEC’s ruling, however, does not necessarily simplify GHG reporting for companies doing business internationally. “If there’s an organization operating globally in Europe, those requirements are not going to go away,” Blades said.

Companies doing business in the European Union (EU) will still be required to report Scope 3 emissions beginning in 2025 for their 2024 fiscal years, pursuant to the EU Corporate Sustainability Reporting Directive (CSRD).

Blades said that for this reason, AEM will continue “to take a more proactive approach” to helping organizations comply with global GHG reporting requirements. AEM recently published guidance for its members in reporting Scope 3 Category 11 GHG emissions.

“We could do 50 more just like that,” Blades said. “We don’t have time to do them all. So that luxury of time is a very good thing.”

Dan Romito, consulting partner for financial services company Pickering Energy Partners, which focuses on capital-intensive industries, said that when it comes to reporting of any kind, companies will adhere to the most stringent set of regulations. Thus, companies doing business in the U.S. and Europe will likely adhere to CSRD requirements.

As for appeasing investors, which drove the SEC rulemaking in the first place, what’s more important is being able to back up the data one is reporting.

“What’s interesting about this wave of rules is that we’re moving into a world of data assurance,” Romito said. “It’s very analogous to what Sarbanes-Oxley did to financial reporting in the early 2000s.”

According to Romito, many firms sharing financial data prior to the Sarbanes-Oxley act, which reformed corporate financial reporting, would do so with the knowledge that few would question its validity. The accuracy and granularity of the data — even non-financial information, such as sustainability data — is now a key issue.

“The world that we’re entering now isn’t necessarily saying give me the data,” Romito said, noting that investors that really want sustainability data, regardless of the regulatory environment, will simply ask companies for it. “It’s give me the data along with the corresponding proof that gives me 100 percent confidence in that data point.”

That proof comes in the form of supporting documentation that validates the degree of confidence an organization has in the data, he said.

The drive to validate sustainability data is a result of global demand for decarbonization from industry. Romito said that every bank globally — especially those in Europe — strives to decarbonize their investment portfolio. Making a claim to decarbonize only to find out later that is not has not occurred is what Romito called a “doomsday scenario” for an investor or bank. As such, they want to have absolute confidence in the sustainability data a company reports.

He added that large OEMs are also interested in being accurate in sustainability reporting to show investors they are decarbonizing. However, the complexity of their supply chains makes this a challenge.

“To complete their respective reporting, if they don’t have the data points and a high degree of confidence in that data from their partners, they won’t be in a position to say that,” Romito said.

Greenhouse Gas Protocol declined a request for comment for this story.