Scope 3 disclosure rules become US ‘battleground’ as investors and companies lock horns

LGIM, BlackRock, Nasdaq, CalPERS and CalSTRS are among those that have waded into the debate.

The head of sustainability for Legal & General Investment Management’s US arm has described Scope 3 disclosures as “the battleground” for corporates and investors in the US.  

John Hoeppner, who leads the asset manager’s regional sustainable investments and stewardship activities, told RI that addressing Scope 3 – indirect emissions generated within a company’s value chain – was being “hugely debated in the US context”. 

Scope 3 emissions include those created by using products and services, and they can often account for the vast majority of a company’s contribution to global emissions. The push to get more firms to disclose this data is therefore seen by some as “a thoughtful ambition”, according to Hoeppner, but others see it as “diverting energy” from current efforts to better quantify direct emissions.  

LGIM believes companies should “walk and chew gum at the same time” by providing both direct and indirect emissions data to investors and other stakeholders, he continued. But recent comments by US oil and gas giant ConocoPhillips suggest this view might put the asset manager in the minority.  

In its 2022 preliminary proxy statement, Conoco said that its investors “overwhelmingly” did not expect it to set Scope 3 emission reduction targets.  

The comments came on the back of a shareholder proposal calling for the firm to set reduction targets for Scope 1, 2 and 3 emissions. That resolution was backed by 59 percent of investors in a vote last year. However, Conoco insisted in its statement, most investors “expressed that the vote was in favour of ConocoPhillips setting Scope 1 and 2 emissions reduction targets, but not in favour of us setting Scope 3 emissions reduction targets”.    

BlackRock opposed attempts to get Exxon and Chevron to set Paris-aligned goals for all direct and indirect emissions at their AGMs this year. The investment giant said in its voting bulletin on Exxon that it viewed Scope 3 emissions differently from Scope 1 and 2 emissions, “given the methodological complexity, regulatory uncertainty, concerns about double-counting and lack of direct control by companies”.  

Most recently, investor division on the role of Scope 3 disclosures has played out on the regulatory stage in the US. In response to the Securities and Exchange Commission’s recent consultation on climate disclosures, which would see large US companies obliged to disclose their “material” Scope 3 emissions, investors came down on different sides.    

In its submission to the consultation, BlackRock urged the SEC to adopt a softer, ‘comply-or-explain’ approach, so that firms that did not feel Scope 3 emissions were material, or those that “are not yet capable of estimating their Scope 3 emissions” could explain why they did not disclose such information.  

Will Martindale, group head of sustainability at UK-based investment firm Cardano, challenged BlackRock’s position on LinkedIn this month, saying: “We favour Scope 3 [disclosures], and we think the SEC’s got this right.” Martindale, who was formerly director of policy and research at the Principles for Responsible Investment, added that: “Scope 3 is material to a company’s valuation, particularly in the US (and EU) where emissions are often in supply chains.”  

The SEC’s proposal currently covers companies with a market value of $250 million or more, but a number of US asset owners including CalPERS, CalSTRS and the New York State Common Retirement Fund have asked it to broaden the scope to cover all listed companies.  

CalSTRS, for example, states in its submission that Scope 3 disclosures should be “without exemption for small reporting companies and without an additional qualifier such as materiality or target setting reference.”  

Echoing BlackRock, US-based marketplace Nasdaq said in its submission to the SEC that it “strongly” encouraged the regulator to drop its approach to Scope 3 disclosures and instead permit all firms to voluntarily disclose such emissions on a comply-or-explain basis.  

It argued that a survey it took of 263 public companies found that more than two-thirds favoured a comply-or-explain approach.  

“[W]e are concerned that the proposal would impose additional complexity, costs and burdens on issuers, suppliers, and ultimately, investors, and thereby undermine the Commission’s core goals,” Nasdaq wrote.    

Legal & General’s Hoeppner told RI that the pushback from firms on Scope 3 disclosures was “quite surprising”, given that it offers opportunities to share accountability across the value chain. “When you are really thoughtful about your Scope 3 emissions, that’s actually helping us to figure out who to engage with around you,” he argued. 

The consultation on the SEC’s climate rule ended last month, attracting hundreds of responses. RI understands that the deadline for the final rule has not yet been set.