Who doesn’t love the latest gossip—I mean reporting—about internal squabbles—I mean debate—at the SEC? This news from Bloomberg sheds some fascinating light on reasons for the ongoing delay in the release of the SEC’s climate disclosure proposal: internal conflicts about the proposal. But, surprisingly, the conflicts are not between the Dems and the one Republican remaining on the SEC; rather, they’re reportedly between SEC Chair Gary Gensler and the two other Democratic commissioners, Allison Herren Lee and Caroline Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation, and whether to require that the disclosures be audited. Just how tough should the proposal be? The article paints the SEC’s dilemma about the rulemaking this way: “If its rule lacks teeth, progressives will be outraged. On the flip side, an aggressive stance makes it more likely the regulation will be shot down by the courts, leaving the Biden administration with nothing. Either way, someone is going to be disappointed.”
According to the article, the issues center around “how much information the agency can force companies to divulge without losing an almost certain legal challenge brought by Washington’s business lobby or a Republican-led state. Another flashpoint involves whether auditors should sign off on the disclosures, ensuring they would be vetted by the same independent watchdogs who review corporations’ financial statements.”
Fundamental to the debate, Bloomberg indicates, is the question of “materiality.” The authors report that Gensler “has been cautioning agency staff to make sure the climate proposal adheres to a legally defensible definition of materiality. He contends that only this approach can survive a legal challenge.” According to the reporters’ sources, “[t]ensions over the divergent approaches have reached a tipping point….At one meeting,… Gensler told SEC lawyers that their work must conform with the interpretation of materiality that has been laid out by the U.S. Supreme Court—a standard that underpins the SEC’s guidance. Gensler made clear that, as far as he was concerned, there would be no more debate on the issue,” the sources told Bloomberg.
Is litigation inevitable? The authors report that “[m]ost Republicans insist that regulating global warming is outside the agency’s jurisdiction, and business groups have already been discussing a litigation strategy.” (See this PubCo post.) But, sources told the authors, Lee and Crenshaw “are less worried about a lawsuit…. Instead, they say the dangers posed by climate change are too serious to take small steps, especially because the disclosures will blaze a new path in securities oversight. Any rule, they maintain, should be broad and not tied to a narrow definition of materiality.”
Commentators cited by Bloomberg suggested that, at issue may be disclosure of Scope 3 GHG emissions, which some companies contend is too remote from their businesses to be material because the information doesn’t relate to their “core operations.” What’s more, companies don’t control the information, which “unfairly makes companies vulnerable to shareholder lawsuits and government enforcement actions.”
In the article, the authors quote former Corp Fin Director Keith Higgins, who suggested that the SEC needs “to think about how difficult it is for companies to get this information…. It’s a real challenge, and companies are rightfully concerned.” The issue is contentious, however, because often Scope 3 “emissions account for the bulk of a company’s pollution.”
According to Bloomberg, the internal debate also concerns whether the climate data should be audited and whether an audit requirement would survive a standard cost-benefit analysis. The authors report that “Lee and Crenshaw argue that step is necessary to assure investors that the disclosures are accurate….Gensler, however, is concerned that forcing audits as opposed to other types of assessments won’t pass muster with a legal requirement that the SEC show the benefits of its rules outweigh the costs, a mandate that opponents often sue over. The chair also has noted that there are no official standards for auditors to follow. Writing those would likely take more than a year and give foes another forum to fight the requirements.”