Directors Split on Scope 3 Litigation Risks
June 12, 2023, Agenda
Agenda featured Andy Jack's commentary in an article about the Securities and Exchange Commission’s proposed climate rule that would require companies to report Scope 3 greenhouse gas emissions arising from their supply chains and the risks the disclosures would pose for companies if they are adopted.
According to Andy, from a regulatory and litigation risk perspective, “there’s obviously a lot of uncertainty because it’s going to depend on the contours of the [final] rule.”
Andy continued, stating, "I think just as boards needed to become financially literate, it is time that boards become carbon literate, or even carbon fluent,” he said. “They really do need to understand the basics of carbon accounting, and the basics of the carbon lexicon. … They need to be aware that there are proliferating carbon regulations around the globe.”
Meanwhile, Andy noted, when it comes to mergers and acquisitions, emissions are increasingly part of the dealmaking discussion.
“Increasingly, we’re seeing transactions where carbon accounting has real economic significance, so you’re going to need to understand how that plays into the economics of a deal. What are the commercial litigation risks associated with that?” Andy asked.
Ultimately, Andy said, boards need to be exercising their duty of care by asking management the right questions.
When it comes to Scope 3 emissions, Andy said companies should recognize what these proposals mean and begin measuring and identifying their plans for mitigating Scope 3 emissions.
Directors, Andy said, should be asking a number of questions, including what their company is doing to assess their supply chain’s emissions and incentivizing supply chains to reduce those emissions; what they are doing to address the upstream emissions of business travel and employee commuting; how they can best deliver products on the downstream side; and how all of these are affecting the bottom line.
“It all ultimately comes down to boards’ exercising good and thoughtful and careful oversight over an element of the company’s business that requires some understanding and questioning of the management of carbon,” he said.
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