The U.S. Securities and Exchange Commission (SEC) recently proposed a rule that would require publicly traded companies to disclose climate-related financial information. It is a long-overdue step toward protecting investors by ensuring that company disclosure of climate risks is level with disclosure of other forms of financial risks. Many of the world’s largest companies estimate that, within just the next few years, they will face a combined $1 trillion in costs due to the impacts of climate change.
Despite the SEC proposal’s focus on public companies, some advocacy groups and members of Congress are expressing concerns that the proposal’s emissions disclosure requirements would impose significant obligations on farmers and ranchers. But that is not how the proposed rule is designed. Only publicly traded companies are required to disclose emissions under the proposed rule, and they can use industry averages and other data to estimate emissions associated with their suppliers, rather than obtain that data from each supplier. And if companies’ estimates are wrong, the proposed rule would shield them from liability.
So, there is no reason to believe that publicly traded companies would voluntarily initiate a massive reporting system for agriculture because of the SEC’s rule.
The SEC’s rule does not impose any requirement on non-publicly traded companies, including farms and ranches
The proposal, if finalized, would require public companies to disclose to investors the climate-related risks they face and the emissions their company is responsible for, including, in some circumstances, emissions from up and down the company’s value chain—also known as Scope 3 emissions. A company’s level of greenhouse gas emissions is highly relevant to its ability to navigate the transition to a low-carbon economy, as high emissions may affect the company’s business operations and associated financial performance as well as its ability to seize opportunities created by that transition.
Read more on Scope 3 emissions
Importantly, the SEC’s proposed rule would apply only to those businesses that are registered with the SEC as publicly traded companies. In other words, any farm or ranch business that does not sell shares to the public, and thus is not registered with the SEC, would not be subject to the SEC’s proposed climate disclosure rule—including Scope 3 emissions reporting.
The SEC’s database of all publicly listed companies does not show any companies registered as engaged in agriculture, forestry, or fishing. Even if there are farms or ranches listed under some other category, the SEC proposal exempts smaller companies—roughly, those registered companies whose outstanding shares to the public are valued at less than $250 million—from Scope 3 emissions reporting.
Thus, it is safe to say that the SEC’s proposed rule would have little to no direct impact on farms and ranches.
Publicly traded companies that are subject to the rule are very unlikely to seek emissions data directly from farms and ranches
Although most farms and ranches are not publicly listed companies and are too small to be directly affected by the SEC proposal, they supply produce and meat to publicly traded food and agriculture corporations, which process these commodities and are typically coded by the SEC as manufacturing or wholesale businesses. According to agricultural trade associations, farms and ranches could be indirectly affected if the corporations they supply are required to disclose their Scope 3 emissions.
A look at the details of the rule, however, reveals that this is not likely:
- The SEC’s proposal would not require all public companies to disclose their Scope 3 emissions. Only very large companies—those with at least $75 million in equity shares available to the public—would be required to disclose their Scope 3 emissions. And that is only if those emissions are significant or if the company has made a commitment to reducing its Scope 3 emissions.
- For large companies that do meet those criteria, the proposed rule does not require them to collect precise emissions data from the farms and ranches—or any other business—from which they source. These companies would be free to estimate the Scope 3 emissions of their agricultural suppliers based on other data as long as they disclosed how they developed their estimates, such as by using data on industry averages or input-output models. In fact, companies that currently estimate the Scope 3 emissions of their agricultural suppliers do so using models based on emissions factors, estimates of acreage or cattle head, and other data.
The SEC’s proposal would not change these approaches whatsoever. Of course, a public corporation could—if it wanted to—seek data from its suppliers, but the SEC rule would not require them to, nor would it require the farms and ranches to disclose the information if asked. Already, reporting corporations have access to useful data that can be used to estimate the Scope 3 emissions from their suppliers without having to get data from them directly. Furthermore, disclosure of Scope 3 emissions is phased in for reporting companies, and those data sources are likely to improve even as the proposal goes into effect.
Large publicly traded banks and other financial institutions that do business with farms and ranches would likely also be required to disclose their Scope 3 emissions, including reporting the emissions of businesses to which the bank makes loans or for which it makes investments. But just like the companies that farms and ranches supply, financial institutions can also estimate these loan and investment portfolio emissions, rather than try to get precise emissions data from every client. There is even a widely recognized methodology for doing so.
Moreover, any bank that wants more precise data is much more likely to seek it from its largest clients, whose emissions make up the largest share of its portfolios, than from the dozens or even hundreds of farms and ranches to which they make relatively small loans.
- The proposed rule provides a special safe harbor from legal liability if a publicly traded company improperly calculates its Scope 3 emissions, significantly reducing the motivation to seek precise data from suppliers such as farms and ranches. Neither the disclosing corporations nor the farmers and ranchers that supply them would face repercussions from the SEC for inaccurate greenhouse gas emissions estimated in good faith.
- If the owner of a farm or ranch did voluntarily calculate its emissions and share the data with its regulated corporate customers, the SEC’s proposed rule would not require the disclosure of identifying information about the sources of data generally. Nor does the rule envision the adoption by farms and ranches of special software to track data, as at least one advocacy group Regulated companies that are required to disclose their Scope 3 emissions would do so by category—not by individual supplier—and would be required to describe the nature of the sources of data, such as supplier data or data from a published database, as well as whether the data was verified by the company, by a third party, or not at all. Reporting companies that disclose their Scope 3 emissions may provide verification of their Scope 3 emissions estimates, also known as attestation, but the rule would not require them to do so.
Moreover, the attestation section of the proposal does not require disclosure to the SEC of identifying information about the sources of emissions data.
The far greater threat to farms and ranches is climate change itself. Corporations and their advisers are well aware of these risks and the business value of reducing them, such as improving reputation, smoothing financial impacts of the volatile energy market, lowering insurance costs, and boosting shareholder confidence. Indeed, many had already engaged in voluntary emissions reduction programs years ago.
Owners of farms and ranches, too, may have many reasons to choose to reduce their emissions. But the SEC’s proposed climate disclosure rule would not require them to do so.