The reaction to the SEC’s 3-2 decision to approve climate-disclosure rule changes suggests the vote may not be the end of the story in terms of either pressure for further regulation or potential efforts to overturn the agency’s actions. In the meantime, governance professionals will be looking at their next steps in terms of compliance.
Those who oppose the rule changes
Tom Quaadman, executive vice president of the US Chamber of Commerce Center for Capital Markets Competitiveness, suggests in a statement that litigation has still not been ruled out: ‘For two years now, the [chamber] has raised significant concerns about the scope, breadth and legality of the SEC’s climate disclosure efforts. We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact.
While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital markets system.
Tom Quaadman, executive vice president of the US Chamber of Commerce Center for Capital Markets Competitiveness
Two of the five SEC members are also unimpressed by the final measures and their comments suggest possible procedural objections.
The [US] Supreme Court has stated that, in extraordinary cases – which I believe includes today’s rule – an agency must cite: something more than a merely plausible textual basis for [its] action. The agency instead must point to ‘clear congressional authorization’ for the power it claims. The commission has not done so for this rulemaking…
Even without the major questions doctrine [a principle of statutory interpretation applied in US law cases] and concerns about statutory authority, the commission conducted a flawed process by not reproposing the rule, raising the question of whether appropriate notice was provided under the Administrative Procedure Act.
Commissioner Mark Uyeda says in his dissenting statement
The final rule is different from the proposal, but it still promises to spam investors with details about the commission’s pet topic of the day: climate. As we have heard already, the recommendation before us eliminates the Scope 3 reporting requirements, reworks the financial statement disclosures and removes some of the other overly granular disclosures. But these changes do not alter the rule’s fundamental flaw – its insistence that climate issues deserve special treatment and disproportionate space in commission disclosures and managers’ and directors’ brain space…
We should be reproposing this rule, not adopting it… The final rule differs quite dramatically from the proposal, both by excluding major provisions and including new rule elements. A reproposal would have helped us better assess these changes. It also would have helped us to understand recent legal developments in California and Europe that raise complex cost and mutual recognition issues.
Commissioner Hester Peirce says in a statement:
Gensler’s defense
In his statement, SEC chair Gary Gensler spells out his view of the commission’s authority on the issue.
Consistent with this agency’s disclosure rules over the decades, today’s final rules are grounded in materiality. Materiality represents a fundamental building block of the disclosure requirements under the federal securities laws. The Supreme Court articulated the meaning of materiality in cases in the 1970s and 1980s. It is this standard of materiality that is reflected in commission rules. It is this same materiality standard that appears in numerous disclosure rules governing registration statements and public company annual reports. It is this same materiality standard that is used throughout the final rules we’re considering today.
SEC chair Gary Gensler
He adds: ‘Already, 90 percent of Russell 1000 issuers are publicly providing climate-related information, though that’s generally in sustainability reports outside of their SEC filings.
Further, nearly 60 percent of those top 1,000 companies are publicly providing information about their [GHG] emissions. Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information. It’s in this context that we have a role to play with regard to climate-related disclosures.’
Other voices
Shareholder advocates and other environmentally focused groups have mixed feelings about the SEC’s final formulation, welcoming what they see as progress but bemoaning the exclusion of Scope 3 emissions. Here are some of their comments.
- Danielle Fugere, president and chief counsel of As You Sow: ‘Transparency is the bedrock of our financial system. While this rule is an important step in improving climate-related disclosures, it ignores a critical component of risk: Scope 3 GHG emissions reporting. This leaves, on average, 75 percent of total [GHG] emissions across all sectors unreported.‘The old business maxim – what gets measured gets managed – is as relevant today as ever. The corollary, of course, is that risk that doesn’t get measured doesn’t get managed. Disregarding Scope 3 emissions creates a significant hole in shareholders’ understanding of climate risk. Decision-making will be impaired by this critical omission.’
- Eli Kasargod-Staub, executive director of Majority Action: ‘This rule marks an important step toward requiring companies to disclose the impact they have on our climate and the risk those business practices pose to investors and long-term value creation. Unfortunately, we have repeatedly seen oil & gas, utility and finance companies do everything in their power to avoid disclosing this information and change their business models to address the severity of climate risk, going so far as to sue to keep shareholder proposals from even being considered…‘With climate change expected to cost the global economy $178 tn over the next half century, the SEC’s rule ultimately does not do enough to provide the level of climate-related financial disclosure and transparency that investors and fiduciaries need, leaving much of the power to decide when to disclose up to companies, including many that want to hide this information. It is vital that this not be the final effort and that the SEC is empowered to enforce this rule through guidance and additional regulations.’
- Mindy Lubber, president and CEO of Ceres: ‘We congratulate the SEC on this important step forward to bring the US closer in line with its global counterparts. Although this final rule does not go far enough compared with international standards and the SEC’s 2022 proposal, it will start to meet the demand for transparency that investors and companies have long sought…‘For most companies and financial institutions, indirect emissions throughout a company’s value chain represent the largest source of a company’s transition risk. While we are disappointed the rule does not include key provisions from its 2022 proposal, including the mandate of the disclosure of Scope 3 emissions, investor demand for the disclosure of Scope 3 emissions continues to grow and many companies will be required to disclose this data in other jurisdictions.’
- Leslie Samuelrich, president of Green Century Funds: ‘It’s a step forward, but we feel it’s too little, too late. We wish the SEC had held fast with its proposal to have companies report Scope 3, or indirect, emissions because investors need this data to make informed decisions about how companies are addressing their climate-related risks.’
Dated: March 22, 2024
