In his introduction to a conversation late last week with SEC Chair Gary Gensler on "Climate Disclosure Developments: The SEC, California, and EU Extraterritoriality," the President and CEO of the U.S. Chamber of Commerce's Center for Capital Markets, observed that, although companies have voluntarily responded to investors by increasingly disclosing information on climate, now policymakers in different states and across the globe are working to impose a plethora of mandatory reporting requirements for climate disclosure. The thing is, they're not consistent. While the Chamber supported disclosure of material climate information, he cautioned that the actions by these policymakers have created a real risk that companies will face duplicate, differing, overlapping and even conflicting requirements. The SEC's proposal to enhance standardization of climate disclosure might offer some real relief on that score, and that makes it all the more important, he said, for the SEC to act within its authority. The potential for public companies to become ensnared in this labyrinth of overlapping and conflicting regulation was the apparent subject of this conversation. In the end, however, Gensler's steady focus was on the remit of the SEC under U.S. law. Risks to issuers arising out of inconsistency with California and the EU—well, not so much.

[All based on my notes, so standard caveats apply.]

Gensler's interlocutor for the dialogue was Tom Quaadman, Executive VP of CCMC, who framed the conversation by observing that, since the SEC's 2010 guidance, companies have increasingly provided voluntarily climate disclosure. Since then, with the CSRD, the EU has issued fairly prescriptive climate rules that may have application to some U.S. companies, the SEC has a pending climate disclosure proposal, the ISSB has issued disclosure rules for voluntary application, and California has adopted sweeping climate disclosure requirements that will apply to many non-California companies that do business in California. Other states are considering jumping into the fray. At this point, he said, it's almost like a three-dimensional chess game, and it will be difficult for companies to navigate.

Quaadman started with California, which he viewed as quite sweeping, encompassing both public and private companies. As an aside, he noted that, if the SEC had come out with rules like California's, the Chamber's lawyers would be in court right now. But it's not just California. Texas is also considering new rules—and these would prohibit certain climate disclosure. Get the drift? A red state/blue state divide has developed. How does that affect the SEC's current rulemaking, he asked?

Gensler emphasized that the SEC is not a climate regulator. Rather, the SEC's remit is to make the capital markets work better for investors and issuers. That was a consistent refrain throughout the conversation. (In fact, I think Gensler said "our remit" almost as much as the Congressional Republicans say "weaponize.") In the climate proposal, the SEC's focus is on investors making investment decisions—what would a reasonable investor making an investment decision consider important in the total mix of information—and on issuers making full, fair and accurate disclosure. In 2021, he said, about 81% of the Russell 1000 provided some climate disclosure, and 57% disclosed Scopes 1 and 2 information. In that context, the role for the SEC is to ensure consistency and comparability, which, he believes, will make the markets more efficient. As to California, he said that the new rules would change the economic baseline for purposes of the SEC's economic analysis because more public companies—estimated to be about 1,400 to 1,500—would already be required to provide climate disclosure under the California statutes.

Drilling down, Quaadman raised the possibility that Texas could enact a law opposing climate disclosure. In its current rulemaking, is the SEC considering a preemption statement? Gensler's only response was that Congress took on preemption with enactment of NSMIA in 1996 (which preempted many state blue sky laws), and, as a federal securities regulator, the SEC has important responsibilities with regard to disclosure by public companies.

Quaadman noted that the U.S. public markets represent about 40% of capital markets worldwide. The EU has enacted the CSRD, and, he believes, the Europeans would like to see the CSRD in effect globally. How does that factor into the SEC's current project? Gensler emphasized again that what the SEC does is under U.S. law as interpreted by U.S. courts. The CSRD will have some application to U.S. companies that meet the thresholds in the legislation, and that will change some of the SEC's economic baseline for its analysis, but, in its proposal, the SEC is focused on driving consistency and comparability.

But what about the idea of equivalence or substituted compliance, Quaadman asked? In Europe, for example, they apply the concept of double materiality (see this PubCo post) and, in the U.S., we also have substantial private litigation, so we have a different perspective. When he was recently in Europe to meet with some EU officials, they talked about the "equivalence" issue. When there are regulatory differences, authorities from each jurisdiction often conduct negotiations about equivalence, recognition and acceptance of the other jurisdiction's standards; for example, in the U.S., foreign private issuers can file financial statements using IFRS, instead of GAAP. When Quaadman has met with European officials to discuss this issue, they have responded that, in this case, they weren't willing to accept anything that didn't include double materiality. (At one point, Gensler actually interjected that Quaadman was probably closer to what was going on with the CSRD than he was.) How does Gensler see the issue of substituted compliance playing out?

Gensler answered that the SEC operates under U.S. law as interpreted by U.S. courts; the SEC's disclosure regime is time-tested, and it's about investors and investment decisions, not climate. Europe has a different remit under legislation enacted by the European Parliament. The SEC will stick to its own authorities. Finally, he added, in what he acknowledged as perhaps a pitch to the Chamber, the best result for U.S. companies would be finalization of a climate disclosure rule by the SEC that is sustained in court. Otherwise, without a U.S. rule, he cautioned, U.S. companies—40% of the global capital market—will look to the disclosure regimes of other jurisdictions. An SEC rule sustained in court means that there can be discussions and negotiations about recognition and substituted compliance. The EU has a different law, and the SEC is not "solving" for their law; it's solving for U.S. law under authorities granted by Congress, he emphasized.

SideBar

Might any of Gensler's emphasis in this conversation on the SEC's remit under U.S. law be, in part, an implicit response to this June letter from the ranking member of the Senate Committee on Banking, Housing, and Urban Affairs and the Chair of the House Committee on Oversight and Accountability? The letter requested information about the SEC's "activities taken in connection or coordination with the European Union ('E.U.') on environmental, social, and governance ('ESG') and climate-related measures that significantly impact U.S businesses, including E.U. climate-related disclosure mandates that closely resemble the SEC's proposed climate disclosure rule." The two policymakers expressed concern that, "under the Biden Administration, the SEC and other federal agencies have been coordinating with, or ceding regulatory responsibility to, foreign regulators on these and other climate measures that will force burdensome and non-material reporting obligations on American companies." Further, they claimed, "it appears that the Biden Administration is seeking to circumvent American courts, and our democratic process, by collaborating with the E.U. to ensure that the desired outcomes of the E.U.'s ESG agenda reach the U.S. through extraterritorial means." It goes on from there.

The discussion then turned to the SEC's proposal. Gensler has indicated that the proposal had received 16,000 comment letters. What are some of the common themes, Quaadman asked?

Gensler responded that, with regard to the GHG disclosure, there were a lot of comments on Scope 3, with investors largely in favor of disclosure of Scopes 1 and 2 and somewhat split on Scope 3. On the issuer side, while some issuers were very supportive, most expressed a number of concerns. On Scopes 1 and 2, some indicated concerns with timing, filing versus furnishing and attestation, but most concerns were about Scope 3. The SEC had anticipated that response, and that's why the proposal took a tiered approach. The agricultural community also had concerns about being pulled into compliance with the rule as part of the supply chains of public companies. Gensler agreed with the legitimacy of their point, indicating that the SEC was looking at the issue. We'll have to wait to see how they address it.

With regard to the more qualitative disclosure requirements, many concerns were raised in the comments about the proposed financial statement footnote disclosure requirement and the potential for proprietary or competitive information being elicited in response to the requirement to discuss scenario plans. There were also issues raised about liability, materiality and board expertise. In conclusion, Gensler said that, in his 2.5 years on the job, the SEC has finalized 27 rules, and, in most of them, the SEC made adjustments in response to comments.

Quaadman also brought up several specific issues. First, on Scope 3, Quaadman observed that the value chain disclosure requirements of Scope 3 elicited duplicative disclosure of the same GHG emissions by multiple entities. (See this PubCo post.) How is that material or relevant to the marketplace? Gensler replied that investors have explained that understanding supply chain emissions can provide insight into transition risk (e.g., regulations may change or customers may choose to buy a product with fewer emissions). Again, the SEC's remit is materiality to the investor. The SEC recognized in the proposal that the concept was not yet as well developed, so the Scope 3 requirement in the proposal was limited to disclosure in the event of materiality or if part of a public commitment. Estimates were also permitted. And with regard to private entities, such as farms, being caught up, the SEC is looking at revisions to make sure that the SEC is not doing indirectly what it can't do directly.

Second, in terms of the proposed changes to Reg S-X, Quaadman asserted that even investors don't believe that the disclosure is material and contended that the benefit is not worth the cost and burden. (As proposed, under Reg S-X, companies would be required to provide metrics and related disclosure—disaggregated climate-related impacts on existing financial statement line items—in a note to the audited financial statements.) Gensler said that they had received complaints about the line-by-line aspect of the disclosure. In addition, while some concerns were raised about the first part of the requirement regarding discussion of the impact of a severe weather event, they had received significant pushback on the second part regarding funds used to manage risk and how that could be determined and calculated. Hmmm, is it that last component potentially on the chopping block? Quaadman reiterated that their analysis showed that investors weren't looking for this information, but Gensler pushed back that, depending on the nature of the event, a severe weather event could certainly be material.

Third, Quaadman asked about implementation deadlines, noting in particular that the EU has delayed some of its implementation deadlines, and that, in signing the California climate bills, Governor Gavin Newsom indicated that the timelines needed a rethink. How is the SEC looking at the aggressiveness of the deadlines in its proposal? Gensler acknowledged that they have received comments on the timing, and ran through the timing in the release.

SideBar

In signing two of the California climate bills, Newsom questioned the implementation timelines—and more. Specifically, on SB 253, Newsom said "the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure. I am directing my Administration to work with the bill's author and the Legislature next year to address these issues. Additionally, I am concerned about the overall financial impact of this bill on businesses, so I am instructing CARB to closely monitor the cost impact as it implements this new bill and to make recommendations to streamline the program." Similarly, on SB261, Newsom said that "the implementation deadlines fall short in providing the California Air Resources Board (CARB) with sufficient time to adequately carry out the requirements in this bill," and made a similar comment about the overall financial impact of the bill on businesses. Is something of a do-over in the cards?

Fourth, on materiality, is there a way to have a narrower approach to material disclosures that would reduce costs? Gensler replied that the staff is looking at the cost factors, but if you have so many companies already making disclosure, that affects the economic baseline analysis. What's more, in his view, the proposal will provide consistency that will ultimately benefit capital formation.

Finally, Quaadman asked about the impact of the regulations on the decision to go or remain public. He argued that increases in regulation could be impediments to that decision. Gensler responded that the staff does look at these issues. In his view, it's important to have vibrant public and private markets. The reason so many companies are already making disclosures, he reiterated, is because investors want to see them. Again Gensler promoted the idea that the Chamber and its members should want the SEC to be successful on this project, that it will benefit the capital markets to have more than just the 2010 guidance. While he recognized that the issuer side especially wanted to see more moderation, investors almost uniformly want to see more consistency around this disclosure. And that's what the SEC is trying to do.

Quaadman thanked Gensler for walking into the lions' den. Laughing, Gensler observed that this type of exchange was an important aspect of the democracy in which he deeply believed and, even if they don't agree on everything, in his view, the SEC benefits from the discussion. The SEC and the Chamber each have a different client base to answer to, and so they disagree on some matters, but he hopes that they can disagree agreeably.

And, in case you were wondering, there was no discussion of the timing of the final rules.

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