Questions were raised about a possible requirement that some CDRA members would need to report their upstream and downstream greenhouse gas emissions.

The U.S. Securities and Exchange Commission’s (SEC) potential new rules on climate risk impacts have raised questions and should raise a few concerns for members of the Construction and Demolition Recycling Association (CDRA), said Enviro-Sciences Inc. Air Practice Leader Chris Whitehead at C&D World 2022.

Enviro-Sciences is based in Lake Hopatcong, New Jersey.

During his presentation, Whitehead outlined how regulations being weighed by the SEC could require companies to report potential climate risk impacts by their businesses and enhance and standardize their climate disclosures.

The SEC says it is considering the new regulations since “investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”

The CDRA and Whitehead are organizing comments on the rule to submit to the SEC because they feel it could be burdensome to some CDRA members. The association hopes to provide additional guidance on the rule if it can get some of its questions answered.

Different levels of emissions disclosure

There are three scopes to the proposed rule. Scopes 1 and 2 are for publicly held companies and will require more strenuous reporting. Scope 3, however, can affect all businesses that take in material from, and send material to, publicly held companies.

Most CDRA member companies do not report to the SEC but would need to do so under Scope 3 to submit upstream and downstream process emissions of their larger public company partners.

Publicly held companies reporting under Scope 1 and Scope 2 would be required to submit emissions from their owned and controlled processes. That would include purchased items, such as electricity, heat, steam, and cooling. Distinct greenhouse gas (GHG) emissions would need to be reported both individually and in the aggregate. Emissions would need to be reported as the gross total before any offsets are considered, and companies also would need to calculate and submit the tons of carbon emitted per dollar of revenue.

Scope 3 emissions submissions—those most likely required of CDRA members—would include emissions generated indirectly from upstream and downstream activities in gross terms and in tons of carbon emitted per dollar of revenue.

Requiring Scope 3 reports on any large scale without clearly defined parameters and guidance could cause emissions to be biased toward higher-than-actual GHG emissions measurements due to the strong likelihood of double counting emissions from upstream and downstream associated companies. 

If a registrant has set a GHG emissions target or goal that includes Scope 3 emissions or if Scope 3 emissions are material, Scope 3 GHG emission disclosures would be subject to securities law safe harbor provisions.

Defining Scope

The proposed rule suggests extending the Task Force on Climate Decisions’ reporting framework. Those guidelines do not explicitly define the boundaries of Scope 3 emissions, instead effectively leaving it to the reporting firms to define how far they want to go with the catch-all upstream and downstream emissions profiles. All goods and products used by the reporting company must be accounted for, but where does one reporting entity stop and the other begin? If CDRA members truck material to a partner company, those emissions must be included in reporting, but should they also include emissions from their process handling operations onsite? This uncertainty will bias any emission sums higher than they should be, likely resulting in future control conditions levied by state agencies that are more stringent than necessary.

Recordkeeping and Record Sharing

Just focusing on the trucking example as a hypothetical case, CDRA members would need to track all shipments to partner companies, including their weight and composition, the type and age of truck used, miles traveled, engine rating, and maintenance history for each truck. Maintenance history would be attested to via a scale to guide the appropriate emissions rating. Generally, top ratings are not allowed once a vehicle exceeds a certain age. GHG reporting is required for carbon dioxide (CO2) and CO2 equivalents (CO2e) using impact factors for all CO2e. 

A potential burden on CDRA members

CDRA member companies tend to keep extensive records on most of this data, but uncertainty and a lack of uniformity could lead to wasted time in transferring data to the reporting companies. Some standardization would be useful. Members would not benefit from the extra year that the rule provides for Scope 3 reporters before compliance since most would be pulled in via their partners who would be reporting under Scopes 1 and 2. 

Materiality

The proposed rule states that the definition of materiality used by a registrant should be consistent with the U.S. Supreme Court’s definition; that is, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote.” The proposed rule emphasizes that materiality is based on facts and circumstances and takes into account qualitative and quantitative factors, as well as the probability and magnitude of future events.

As a best practice, the industry has defined materiality as more than de minimis levels of emissions, more than one percent to 2 percent of average annual reportable emissions from the reporting company.