The SEC has apparently let it be known—or perhaps a few reporters are especially intrepid—that it may well pare down and loosen up some of its proposed rules on climate disclosure (see this PubCo post, this PubCo post and this PubCo post). In this article in Politico and this article in the WSJ, "three people familiar with the matter" and "people close to the agency" told reporters that SEC Chair Gary Gensler is "considering scaling back a potentially groundbreaking climate-risk disclosure rule that has drawn intense opposition from corporate America." According to Politico, SEC officials "stress that no decision has yet been made," so time will tell where the final rulemaking will end up.

As reported in Politico, a primary motivation for the anticipated relaxation is "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." But the threat of litigation over the rule is not new. "Litigation has been hanging over the SEC's head for some time," Politico continued, "In September, while testifying on Capitol Hill, Gensler was peppered with questions about the rule, as many Republican senators zeroed in on the implications of the Supreme Court case, West Virginia v. EPA. At the time, Gensler said the SEC takes 'seriously the courts and particularly the Supreme Court,' but defended the agency's ability to pursue the plan. 'Investors are using this information now, and they want the information,' Gensler said. 'And I think it does fit into our 80- or 90-year history of how we do disclosures.... We have a role to ensure that there is not only investor protection, but, as the law said, fair dealing that the actual disclosures are not misleading.'"


In April last year, in a keynote address entitled "Building Upon a Long Tradition," Gensler vigorously pressed his case that the SEC's new climate disclosure proposal was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors "decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures," Gensler observed, the SEC's disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has "stepped in when there's significant need for the disclosure of information relevant to investors' decisions." As has been the case historically, the SEC "has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors." The proposed rules, he said, "would build on that long tradition." (See this PubCo post.)

Politico reports that Gensler's view has serious support from the legal world: "Former SEC officials, including several commissioners from both sides of the aisle, academics and even one former clerk to conservative Supreme Court Justice Neil Gorsuch have written in support of the agency's powers to regulate corporate disclosures, even if they relate to emissions. 'This is essentially core SEC rulemaking,' University of Pennsylvania law Professor Jill Fisch said."


Opponents of the SEC's climate disclosure proposal have long been plotting their litigation strategies, and there is really not much question that the rules will be challenged in court—especially now that SCOTUS has given its imprimatur to the "major questions" doctrine in West Virginia v EPA. That decision may well have thrown a monkey wrench into the rulemaking. According to former Commissioner and Stanford Professor Joe Grundfest, "[i]t's clear the agency was thrown for a loop" with the decision in West Virginia.

West Virginia v EPA came to the Supreme Court as the attorney generals of West Virginia and other states and entities sued EPA, questioning its authority under the 1970 Clean Air Act to issue broad systemic regulations governing GHG emissions from power plants. In the majority opinion, SCOTUS declared that this case was "a major questions case," referring to a judicially created doctrine holding that courts must be "skeptical" of agency efforts to assert broad authority to regulate matters of "vast economic and political significance"; in those instances, the doctrine required, the agency must "point to 'clear congressional authorization' to regulate.'" SCOTUS concluded that the Clean Air Act did not give EPA that authority. Rather, the Court said, a "decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body." (See this PubCo post.)

The major questions doctrine is likely to be brandished regularly against significant agency regulations across the board, and particularly against the SEC's climate disclosure proposal—"Court Decision Leaves Biden With Few Tools to Combat Climate Change" was one of the headlines from the NYT when the decision was handed down. As reported by Reuters, when asked by Bloomberg TV about the impact of the decision on other agencies, Senator Patrick Toomey "singled out the SEC rule," claiming that the SEC is "attempting to impose this whole climate change disclosure regime...with no authority from Congress to do that." And in a September hearing of the Senate Banking, Housing and Urban Affairs Committee, Toomey warned Gensler that, after West Virginia, the SEC should consider itself to be on notice from the courts. Toomey considered the climate proposal to be readily subject to challenge under the "major questions doctrine": 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 that 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 a similar form before. The SEC cannot use a novel interpretation of a statute to "pretend" it has authority, he said. Because, he believed, the SEC did not have Congressional authorization for the proposal, he advocated that the SEC rescind the proposal. (See this PubCo post.) (And as the WSJ notes, the likelihood of Congressional action now to provide express authorization is slight: "President Biden is unlikely to push significant additional climate legislation through a divided Congress, which has added pressure on regulatory agencies to address the issue.")

Both publications observe that the climate disclosure proposal has received a bashing from corporate America, including trade organizations such as the U.S. Chamber of Commerce. In particular, the WSJ reports, "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.


What are these financial metrics? In an unusual aspect of the proposal (see this Bloomberg article), the SEC itself proposed changes to Reg S-X that would require a company to disclose in a note to its audited financial statements specified disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items. Disclosure would be required for the company's most recently completed fiscal year, and for the historical fiscal years included in the consolidated financial statements in the filing. The proposed rules would require disclosure under the following three categories of information: financial impact metrics; expenditure metrics; and financial estimates and assumptions, with a 1% disclosure threshold. (See this PubCo post.)

As discussed in this July report from KPMG, Responses to the SEC's Climate Proposal, perhaps the least popular proposed requirement was inclusion of metrics in the notes to the financial statements. Only 13% of commenters supported inclusion of information in the audited financial statements, while 22% preferred that this type of information be included instead in the MD&A. The reaction was quite mixed to the proposed GHG emissions disclosure mandate. With regard to disclosure of Scopes 1 and 2 GHG emissions, most commenters (42%) were silent on the issue; 17% supported the mandate, 34% supported it with changes and just 7% opposed it altogether. There was more opposition, however, to the proposed Scope 3 disclosure requirement: only 11% supported the proposal; 34% supported it with changes and 30% opposed the requirement entirely; 25% were silent. For more on this survey of public comments, see this PubCo post.

In some cases, even investors that favored the proposals in general have still raised specific issues regarding the financial statement requirements. Bloomberg has reported that, although "tethering climate risk to financial risk remains a key goal of investors," a number of investors or investor representatives, such as asset manager BlackRock and the Council of Institutional Investors, have either recommended to the SEC that it should eliminate the financial statement requirement or "replace a 1% line item reporting threshold with the materiality standard typically used in financial reporting." According to a representative of the Bank Policy Institute, the financial statement disclosure "was something that quite frankly nobody was expecting to see in the proposal....It goes much further than any other jurisdiction. And it's just not something that companies are doing really at this point." Nevertheless, Bloomberg reports that "[s]ome sort of financial statement disclosure about climate impact is expected to remain in any final rule, despite objections from large Wall Street banks and others."

According to the WSJ, the SEC said that, to elicit important information, it often uses bright-line tests; the proposed 1% threshold "would reduce the risk of companies' underreporting climate-related information in their financial statements." However, a senior climate and finance policy analyst at Americans for Financial Reform, a nonpartisan consumer and investor advocacy group, told the WSJ that the proposed 1% threshold for the financial metrics is "'not the hill I would die on,' [adding] that other proposed changes to companies' financial statements are more important, such as a requirement that companies disclose the assumptions they use to make forward-looking estimates regarding, for instance, the profitability of fossil-fuel assets."

Although the WSJ expects that the final rules "will likely still mandate some climate disclosures in financial statements, according to the people close to the agency[,] the commission is weighing making the requirements less onerous than originally proposed, the people said, such as by raising the threshold at which companies must report climate costs....After the backlash to the climate proposals, officials are considering changes such as a higher trigger for disclosure, using different percentages depending on the financial item in question or eliminating a bright-line test altogether, the people close to the agency said."

According to Politico, the SEC is also considering how to handle "one of the most contentious pieces of the plan: A mandate that certain large public companies report data about carbon emissions from their extensive supply chain networks and customers, known as scope 3, the people said."


As defined by the SEC, Scope 3 emissions are "all indirect GHG emissions not otherwise included in a registrant's Scope 2 emissions, which occur in the upstream and downstream activities of a registrant's value chain. Upstream emissions include emissions attributable to goods and services that the registrant acquires, the transportation of goods (for example, to the registrant), and employee business travel and commuting. Downstream emissions include the use of the registrant's products, transportation of products (for example, to the registrant's customers), end of life treatment of sold products, and investments made by the registrant."

Under the proposal, for a company that is not a smaller reporting company (which would be exempt from Scope 3 disclosure), if the company's Scope 3 emissions are material, or if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions, the company would also be required to disclose separately its total Scope 3 emissions. According to press reports, the internal wrangling at the SEC—among the Democratic commissioners—over whether or not to require disclosure of Scope 3 emissions was fierce and one of the reasons for the delay in the release of the climate disclosure proposal. (See this PubCo post and this PubCo post.) In some circumstances, the proposing release indicated, Scope 3 emissions may represent the bulk of a company's emissions, and disclosure may be necessary in some cases "to present investors a complete picture of the climate-related risks?—particularly transition risks?—that a registrant faces and how GHG emissions from sources in its value chain, which are not included in its Scopes 1 and 2 emissions, may materially impact a registrant's business operations and associated financial performance." (See this PubCo post.)

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 reports 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.

Politico reports that the SEC has "discussed making the scope 3 requirements 'more workable' for companies, given the feedback the agency is getting....If the carbon emission disclosure requirements are curtailed, the SEC could preempt one of the business community's biggest concerns about the plan." But apparently, the SEC is "still grappling with what to do about one of the most aggressive parts of the plan."

Scaling back could also make the rule more of a challenge for potential plaintiffs, make it less "vulnerable," per Professor Fisch. The WSJ suggests that relaxing the proposed "the financial-reporting rules could bolster the agency's legal defense by allowing it to demonstrate that it has listened to business concerns and reduced the forecast multibillion-dollar annual cost of the new system." 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. The same senior climate policy analyst at Americans for Financial Reform told Politico that they "still think the proposal should be finalized broadly in the same form....It would be a mistake to not follow through." 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 reports, contend that "predicting what the courts will do is impossible and shouldn't discourage action now." Fisch remarked that "[w]hether the SEC opts to include scope 3 as it is drafted in the proposal or scrap it entirely, the lawsuits will come either way...'It's very hard to predict how far the court will go.'"

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