Whatever figure a company reports under the rule the Securities and Exchange Commission adopted last week, it will not be that company’s emissions, and it will be published in a filing that calls it emissions.
That is not an accusation of bad faith. It is a consequence of which parts of the proposal survived, and understanding it requires understanding what a disclosure rule is, which most coverage assumes and almost none explains. So: a primer.
What a disclosure rule is not
Start with the thing people assume and are wrong about. This is not a limit on emissions. The SEC has no authority to cap what anybody emits and has never claimed any.
Its remit is securities markets, and its statutory instrument is the requirement that companies selling stock to the public tell the buyers certain things. That is the whole toolkit: a list of what must appear in a filing, and liability if what appears is false.
So a climate disclosure rule is a rule about paperwork. Its theory is that investors price what they can see, and that a company obliged to publish something will manage it differently than one that is not. Whether that theory holds is arguable. What is not arguable is that the rule cannot reduce a ton of anything directly.
The three scopes, which is where the number goes wrong
Greenhouse gas accounting divides emissions into three categories, and the division is the entire subject.
Scope 1 is what a company burns itself. Its boilers, its furnaces, its own vehicles. Direct, measurable, and generally small outside heavy industry.
Scope 2 is the electricity it buys. Somebody else burned something to make it, the company consumed it, and the arithmetic is a meter reading multiplied by a grid factor.
Scope 3 is everything else in the chain. Everything a company buys from its suppliers, and everything that happens to what it sells after it sells it.
For most businesses, Scope 3 is not a component of the total. It is nearly all of it. An oil company’s Scope 1 is what it burns running refineries; its Scope 3 is the combustion of the product. A retailer’s Scope 1 is its trucks; its Scope 3 is the manufacture of everything on the shelves. A bank’s Scope 1 is its office heating; its Scope 3 is what it lends to.
What survived in the final rule
Scope 3 was removed entirely, and the requirement to report Scope 1 and Scope 2 was narrowed, limited by a materiality standard and phased in over several years starting with the largest filers.
The rule retained a good deal else. Companies must describe climate-related risks that are reasonably likely to have a material effect, how the board oversees them, any targets the company has set publicly, and the financial effects of severe weather events on its accounts.
The commission adopted it on a three to two vote, and a split of that kind is usually a signal about what happens next in court.
Why Scope 3 fell, which is a legal answer and not a political one
The obvious reading is that industry objected and won. That is part of it and it is not the load-bearing part.
The commission’s authority runs to information material to investors in the company filing. Scope 3 is information about other companies: suppliers, customers, the people who eventually burn the product. Requiring a filer to collect and certify data about entities it does not control, and to accept liability for its accuracy, is a much harder thing to defend as an exercise of securities authority than requiring it to report its own meter readings.
There is also a practical problem that is not ideological. Scope 3 data is mostly estimated, using industry averages applied to spending. Two honest companies with identical operations can produce Scope 3 figures that differ by a wide margin depending on methodology, and a disclosure regime that mandates a number nobody can verify creates liability without creating information.
Both of those are real objections. The consequence of accepting them is that the rule now requires the small, verifiable part and omits the large, unverifiable one.
So what does the number mean
It means what it says, provided you read the label carefully, and almost nobody will.
A filing reporting Scope 1 and Scope 2 is reporting what the company burned and what it plugged in. That is a real fact, it is auditable, and it will be broadly comparable between companies in the same industry, which is more than could be said for the alternative.
What it is not is a measure of the company’s contribution to the problem, and the risk is that it gets used as one. A number in a regulatory filing acquires an authority that its footnotes do not, and an oil company reporting a modest figure for refinery operations will find that figure quoted as its emissions by people who have not read the definition.
What an investor actually gets
Strip out the emissions argument and the more useful half of the rule is the part getting the least attention.
The requirement to disclose the financial effects of severe weather on the accounts is ordinary securities disclosure doing ordinary work. A company whose plants flood, whose crops fail, or whose insurance has repriced has a fact that bears on its results, and has often had it without stating it plainly.
Likewise the requirement to disclose targets. A company that has publicly announced a net zero commitment must now say what it is doing about it in a document carrying liability, which is a meaningful change from announcing it in a brochure.
What happens next
Litigation, immediately and from both directions, which is the predictable consequence of a three to two adoption. Challenges arguing the rule exceeds the commission’s authority, and challenges arguing it was watered down improperly, and a strong chance the rule does not take effect on the schedule as written.
For anybody who has to comply, the practical advice is unchanged by any of that. The first reporting year is far enough out that the work is systems work, and systems work takes longer than litigation. A company that waits for the courts and then starts building a Scope 1 and 2 measurement process will be doing it under a deadline.
And the number to watch, once filings start appearing, is not the emissions figure. It is how many companies conclude that their Scope 1 and 2 emissions are not material and therefore say nothing at all, because the materiality qualifier is the part of this rule that will determine how much of it exists in practice.
