Here's a scoop from S&P Global Market Intelligence : apparently, the climate disclosure rulemaking that was targeted for adoption in April 2023 has now been pushed back to the fall. At least that's the information that former SEC Commissioner Robert Jackson has learned and revealed on a recent webinar. But given the thousands of comment letters and all the controversy over the climate disclosure rules, including pushback from politicians claiming the SEC had no authority to adopt climate disclosure rules, are you really surprised?
According to S&P, Jackson told the webinar audience that he had "'just understood over the last few weeks that it looks like the rule is going to be pushed back a little further than many had thought, including myself....It [now] looks more like the fall of this year.' Given the new time frame, financial statements and disclosures under the rule would not be due until 2024, Jackson said." [My guess is that he really meant 2025, since 2024 was the optimistic original due date in the proposal, assuming an effective date at the end of this year.] Agenda added that Jackson believed there was "good reason" for the delay: "that it's a crucial rule that requires thoughtful, detailed staff policymaking and they've gotten lots of good comments that give them the opportunity to make this rule the best possible rule it can be." S&P noted that "the SEC did not immediately respond to a request seeking to confirm the latest delay."
As you know, the SEC's proposed rules on climate disclosure would require public companies to disclose information about the material impact of climate on their businesses, as well as information about companies' governance, risk management and strategy related to climate risk. The disclosure, which would be included in registration statements and periodic reports, would draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Compliance would be phased in. The proposal would also mandate disclosure of a company's Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company's emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 for large accelerated filers and accelerated filers. The proposal would also require disclosure of certain climate-related financial metrics in a note to the audited financial statements. (See this PubCo post, this PubCo post and this PubCo post.)
The controversial proposal has been met with extraordinary legal and political challenges from Congress and the business community. Not to mention that the SEC is faced with the need to provide a nuanced balance of the substantive goals and requirements of the proposal in response to the comments received.
Many members of Congress have stridently objected to the rulemaking. SEC Chair Gary Gensler, testifying before the House Subcommittee on Financial Services and General Government at the end of March, was faced with a subcommittee on a mission about the SEC's climate proposal. One member even went so far as to suggest that the climate proposal represented a "weaponization" of the SEC.
Although one subcommittee member viewed the climate proposal as important and urged Gensler to press on, that was distinctly at odds with the zeitgeist prevailing at the hearing. Here's a flavor of the questioning (based on my notes, so standard caveats apply):
- Members contended that the SEC is "sprinting" outside of its lane on the climate proposal and, mixing metaphors, it's high time for the SEC to "reel it in." What authority does the SEC have to address climate? At least three members reported that they had reviewed the '33 and '34 Acts that were cited as authoritative and didn't see a single mention of "climate" or "greenhouse gas emissions" or "social." The SEC's job is to execute the laws, not create them; the anti-deficiency laws prevent employees from using funds for activity that is unauthorized. One member observed that Congress took up a bill to authorize the SEC to mandate climate disclosure last year, but it didn't pass the Senate—underlining the absence of authority. Has the Chair heard of West Virginia v. EPA and the "major questions" doctrine?? (See this PubCo post.) This is unauthorized rulemaking—public opinion flows through Congress, which tells the SEC what the public thinks is important and what to do about it. The SEC is asking for more funding, but it has tasked employees to perform outside of their core functions.
- One member suggested that the SEC's climate proposal—especially a Scope 3 mandate—reflects a "true weaponization of the department" and hurts Iowa farmers. Another said that, even if farmers aren't public companies and thus directly regulated, they still would be called upon to comply by customers as part of the supply chain, if the mandate for Scope 3 disclosure were adopted. Is the impact on small business part of the analysis?
- Scope 3 reporting will be expensive, and companies say they can't afford it, especially small companies in the supply chain. Can commenters write in to the SEC and get the SEC to mandate whatever they want? If there are 10,000 investors writing in, what about the impact on the rest of the US population? Can investors just impose a disclosure mandate on all these businesses? Is that fair? If companies are already making disclosure, that's their choice, but the SEC's proposal goes beyond that. This proposal is about as unfriendly to business as the member had heard in a long time—why do we keep "sticking it to the businesses by piling on regulations"?
- One member noted that there was a big difference between mandating disclosure of internal metrics, such as executive comp and revenue, and external metrics like climate. Isn't it apples and oranges? There has long been values-based investing, but for the federal government to come in and identify the values on which it wants reporting is troubling. A lot of green products are made with forced or child labor, he said. Is the SEC planning to require reporting on that?
- In its search for consistency through prescriptive regulation, is the SEC becoming judge and jury about which risks are important and which are not? Companies differ.
- Aren't there enough people already checking on GHG emissions? Why do we want the SEC doing the same? How will the SEC verify that the disclosures are accurate and not misleading? Is the SEC "planning to hire a bunch of scientists"?
- One member asked why the SEC is vetting the accuracy of disclosures made to satisfy the political agenda of some activist investors? Looking at disclosure about a major environmental accident or EPA consent decree is one thing, but policy disclosure designed to meet social norms on a website is something else. Why should the SEC expend valuable resources on that, instead of just preventing fraud? Can't investors engage private entities to do that vetting? Isn't that outside the SEC's remit?
There's more—see this PubCo post.
And Gensler ran a similar gauntlet last year in testimony before the Senate Banking, Housing and Urban Affairs Committee. Although a few Senators favored the SEC's proposal and strongly encouraged Gensler to proceed, a significant number of Committee members expressed concerns, then-Ranking Member Pat Toomey most ardently. He said that it was no secret that some want to use financial regulation to advance their liberal agendas—a practice he viewed as highly undemocratic because it would be accomplished through the use of unelected bureaucrats. He considered the SEC's climate proposal to be a prime example. Public companies are already required to disclose material information; in his view, the information elicited by the proposal is expensive to obtain and not financially material. In fact, he stressed, the cost of compliance with the rule was more material than the disclosure itself. These controversial and burdensome rules were outside the SEC's mission and authority. After West Virginia v. EPA (see this PubCo post), he warned, the SEC should consider itself to be on notice from the courts.
As noted above, Toomey considered the climate proposal to be readily subject to challenge under the "major questions doctrine" enunciated by SCOTUS in West Virginia v. EPA (see this PubCo post): given the economic and political significance of the rulemaking, the SEC would need to point to clear Congressional authority. This rulemaking, in his view, seemed to fall easily under the doctrine: the rule would involve a novel approach; would require technical and policy expertise not typically needed by the agency; as a consequential decision, was unlikely to have been left by Congress to the agency; and had previously been rejected by Congress in similar form before. The SEC cannot use a novel interpretation of a statute to "pretend" it has authority. Because, he believed, the SEC did not have Congressional authorization for the proposal, he advocated that the SEC rescind the proposal.
Issues were even raised from the other side of the aisle. Senator Jon Tester said that, as a farmer, he appreciated the issue of climate change: because of climate change, in the last two years, his farm had had its two worst harvests ever. But, he said, he also understood the burden of reporting. While a small farm like his would not be subject to a direct reporting mandate, he was still concerned that, under the proposed requirements for Scope 3 reporting, public companies to which he sells his wheat would need to comply, and, as customers, they will be insisting that he provide them with data. But he and other farmers like him don't have the time and ability to provide that data—it will be a tremendous burden. Gensler replied that he understood the concern; this issue had been raised frequently in comments the SEC received, and they were trying to achieve a balance. He agreed that this topic required a second look to examine the impact on private actors—there was no intent to touch farmers and ranchers. (See this PubCo post.)
And the climate disclosure proposal has received a bashing from much of corporate America, including trade organizations such as the U.S. Chamber of Commerce. This article in Politico and this article in the WSJ suggested that Gensler was "considering scaling back" the proposal in light of the "intense opposition from corporate America" that it had elicited, including "the wave of lawsuits that are expected to challenge the rule once it's finalized....Lawsuits are expected to challenge both the content of the rule itself and the SEC's authority to pursue it—an argument that may carry new weight with the Supreme Court moving to rein in the so-called administrative state."
In particular, the WSJ reported, "SEC officials have been taken aback by the strength of opposition to their financial-reporting proposals, people close to the agency said. Many companies said the changes would bring high costs, complexity and potential unintended consequences....The proposed reporting rules would require public companies to include a raft of climate data in their audited financial statements. The mandated disclosures cover everything from costs caused by wildfires to the loss of a sales contract because of climate regulations, such as a cap on carbon emissions." As a result, the SEC, according to the WSJ, has been focused on determining whether and how to revise the financial reporting metrics in the proposed rule.
Business trade organizations, such as the National Association of Manufacturers—which has not been reluctant in the past to go to court over SEC regulations (see, e.g., this PubCo post and this PubCo post)—are critical of the Scope 3 requirement, which they believe would elicit disclosures that are "riddled with legal, reliability and usefulness questions for investors and companies." Politico reported that, in an interview, a NAM representative made clear that "[a]ll options are on the table," including litigation, "We're going to throw the full weight of the industry behind [this] effort," he said.
And then there is the need for the SEC to strike a fair balance in the final rules. As characterized to the WSJ by a senior director at the Chamber's Center for Capital Markets Competitiveness, "the SEC needs to adjust the proposal if it wants to produce 'a court-durable final rule.'" But scaling back the proposal too much also risks disappointing sustainability advocates who are clamoring for extensive climate disclosure, particularly Scope 3 emissions. A Democratic aid told Politico that "the SEC should not back down in the face of baseless attacks by corporate lobbyists and preemptively water down the rule." Climate advocates, Politico reported, contend that "predicting what the courts will do is impossible and shouldn't discourage action now." (See this PubCo post.)
Given the legal and political challenges, along with the need to craft a balanced set of rules—one that would be likely to survive a court challenge—it's hardly surprised that the process is taking longer than anticipated.
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