The SEC’s proposed greenhouse gas disclosure rule is wild

Co-authored with Craig Coben, a former investment banker at Bank of America, where he served most recently as co-head of global capital markets for the Asia-Pacific region.

Governments and businesses around the world have long chafed at the way the US enforces its laws abroad. But the US is now poised to take extraterritoriality to the next level by introducing emission disclosure rules that have largely gone unnoticed.

The US has issued multibillion-dollar fines against European corporate champions for bribing foreign officials in breach of the US Foreign Corrupt Practices Act, or for clearing dollar transactions for Iranian and Cuban entities in violation of the Trading with the Enemy Act, even though the conduct happened outside the US and didn’t involve any US entities. The long arm of US enforcement also compels foreign companies to comply with US export regulations on a long list of countries. The US has more recently been accused of “weaponising” the dollar to force other countries to abide by its policy preferences.

The next prong in this de facto financial empire is a new seemingly dry and technical greenhouse gas disclosure rule proposed by the Securities and Exchange Commission that will in practice bring a large chunk of the global business community under the US regulatory umbrella.

In a nutshell, the new rules require certain US public companies (amounting to the lion’s share of the US corporate world) to disclose what are known as “scope 3 greenhouse gas (GHG) emissions.”

Scope 1 emissions are those which companies generate directly, while Scope 2 emissions are those caused by the energy used by the company. Scope 3 covers indirect emissions from upstream and downstream activities in a company’s value chain, such as suppliers or distributors, or relating to how customers use the company’s products. For many companies, this category might encompass the majority of its GHG emissions.

If the new rules pass, it is likely that almost every company that does business with a sizeable US company will be subject to a backdoor requirement that it calculate and disclose its greenhouse gas emissions — even if that company otherwise has no stock market listing in the US or even any presence in the US. This is extraterritoriality on steroids.

What are the potential implications for non-US companies?

Expense and complexity: Most companies, especially smaller and midsized companies, likely lack both the expertise and resources to calculate their GHG emissions. Moreover, when these rules come into effect, there is likely to be few entities qualified to audit and certify those emissions, potentially leading to a backlog that might hinder the ability to market services or products to regulated US companies.

Competitive (dis)advantage: If you are doing business with a listed US company, your GHG emissions might have to be quantified and reported by the US entity. This might mean that if a US company has several choices for suppliers, a counterparty with a better handle on its GHG emissions might be a preferred vendor, since it makes it easier for a US company to manage its SEC compliance.

The winners are likely to be US companies or companies in developed nations with experience in compliance with an extensive regulatory agenda; the losers will be emerging country market suppliers and distributors in many cases, regardless whether they cause lower or higher GHG emissions.

Liability to US enforcement. Just because a company has no US operations or offices doesn’t mean it can’t get sued or be the target of US enforcement action. A Brazilian company providing incorrect GHG data could theoretically be held liable by the SEC in a US court for aiding and abetting the securities fraud of a reporting US company, or potentially be named as a target in a private class action.

And, in the absence of universally accepted reporting standards, the risk is real and substantial. Even though there’s a safe harbour for reasonable statements and those made in good faith, it is vague and so may not protect a company from aggressive plaintiffs or regulators.

Attractiveness as a Merger Target. Non-US entities that are acquisition targets of a US company might be more or less attractive based on the robustness of their GHG emissions reporting. If, say, a Swedish firm has no idea what the GHG emissions are of its counterparties or suppliers, that might make it a less attractive acquisition target for a reporting US company.

For many smaller companies, acquisition by a larger entity is key to their exit plan, and failure to adhere to these rules might make a sale to US-based acquirers that much harder.

The proposed rules cast an extraordinarily wide net, potentially capturing many companies that never expected to be regulated by US financial authorities.

It used to be argued that a foreign company that lists on a US stock exchange or has substantial operations in the US has in effect consented to complying with American laws even for their conduct abroad. But now even just acting as a supplier or distributor for a US company in a foreign country can subject a company to onerous SEC rules and enforcement.

If the hallmark of government legitimacy is “consent of the governed,” the SEC’s new environmental disclosure rules — with their unprecedented extraterritorial reach — might very well fail this pretty essential benchmark.

This article originally ran on the Financial Time's Alphaville blog.