Here’s a big scoop from Bloomberg: the “SEC is months away from finalizing expansive new climate disclosure requirements as the agency juggles investor demands for more transparency, tech glitches and a tough Republican legal threat.” Are you really surprised though? That was a substantial, complex undertaking that elicited thousands of comments and a lot of pressure from opponents and proponents. Then, in July, came another challenge, as SCOTUS handed down West Virginia v EPA, which, although not directly addressing the SEC’s climate proposal, sure seemed to put a bull’s eye on it. (See this PubCo post.) Not to mention the SEC’s technical glitch, which led to a reopening of the comment period for a couple of weeks until November 1. (See this PubCo post.) That alone would have been enough to smoke the October target date set in the most recent SEC agenda. (See this PubCo post.) But what is real timeframe? Well, who knows. According to Bloomberg, SEC Chair Gary “Gensler has declined to give a timeline for finishing the climate regulations in recent public appearances, repeatedly pointing to thousands of comments that still need to be reviewed.” Bloomberg also reports that SEC “officials in private conversations have given no indication they’ll finish the rules this year, according to several people in contact with the agency.” [Emphasis added.]
At over 500 pages, the SEC’s climate disclosure proposal would add an entire new subpart to Reg S-K and a new article to Reg S-X. Based on the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol, the proposed new rules would require public companies to disclose information about any material climate-related impacts on strategy, business model, and outlook; governance of climate-related risks; climate-related risk management and climate-related targets and goals, if any. In addition, companies would need to provide specific greenhouse gas metrics in financial statements. The proposal would also mandate disclosure of a company’s Scopes 1 and 2 GHG 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 disclosures would be required under a separate caption, “Climate-Related Disclosure,” in registration statements and Exchange Act annual reports (with material updates in Forms 10-Q) (See this PubCo post, this PubCo post and this PubCo post.)
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.
That case 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.”
The major questions doctrine is likely to be brandished regularly against significant agency regulations across the board, and particularly at 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.” (See this PubCo post.) 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.)
According to Bloomberg, “West Virginia could be first in line to take on the SEC. [T]he state’s attorney general…threatened to sue the SEC over the rules before they were even proposed. Mandatory disclosures on climate change and other environmental, social and governance issues would violate companies’ First Amendment rights, he told the agency in a 2021 letter.” West Virginia v. EPA, he observed to Bloomberg, “makes it very hard for the SEC to require any corporate climate disclosures….Scope 3 is only part of the problem, he said. ‘The more they want to withdraw from this, we say, Thank you, and we will be pleased to limit the scope of our litigation against them….’”
Threats of litigation like that one have led Gensler to struggle with the proposed requirements, especially proposed disclosure of Scope 3 GHG emissions. As discussed below, companies, industry representatives, farmers—even farmer Senators—have resisted the requirement as too burdensome and expensive. Bloomberg reports that Gensler and “his fellow Democratic commissioners fought for months before the proposal’s release over whether to include Scope 3 reporting requirements. Gensler feared the provisions would bolster court cases to scrap the climate disclosure rules, but Commissioners Caroline Crenshaw and Allison Lee convinced him to proceed. Lee is no longer on the commission. Her successor, Democrat Jaime Lizarraga, has said investors need carbon footprint disclosures, particularly information on Scope 1 and 2 emissions from companies’ direct operations and power usage. He has yet to speak specifically about Scope 3 disclosures.” Bloomberg has previously reported that those internal squabbles about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation, bogged down the issuance of the proposal in the first place. (See this PubCo post.)
As reported by Bloomberg, a “person with actual knowledge of the SEC’s climate rule writing process” observed that the “volume of comments is the primary factor in the amount of time it will take to finalize the rule.” The SEC received over 4,000 unique comment letters that the SEC staff reads and takes into account in developing final rules. On the one hand, companies and industry representatives have asked the SEC to “dramatically cut back on its climate mandates and give them more flexibility. Aspects of the rule they see as ripe for substantial revisions include Scope 3 emissions reporting,” as well as the requirement to include specific climate metrics in the footnotes to the financials. The article cites a company that “called the proposed footnote in the audited financial statements ‘overly burdensome.’”
On the other hand, sustainability and environmental advocates, asset managers and other institutional investors have long expressed support for mandatory climate reporting, demanding “consistent and comparable metrics and more company details about the climate risks that only the SEC can offer through its rules.” Bloomberg, citing a report from sustainability advocacy group Ceres, observes that “[m]any investors back the core tenets of the SEC’s proposal—including Scope 3 emissions reporting—if the emissions are significant to the company or the company has set a related reduction target.” Some expressed concern that if the SEC rolled the proposal back too far, it may not be useful for investors.
In some cases, investors may favor the proposals in general, but still raise specific issues. Bloomberg reports 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.”
The controversy over the proposal was also evident in Congress where, at a hearing by the Senate Banking Committee, Gensler heard both praise and criticism of the proposal. Some of the Committee members enthusiastically favored the SEC’s climate disclosure proposal; there was a need for standardization, truth in advertising, and even Scope 3 disclosures. But criticism came from both sides of the aisle. Some contended that the SEC was using regulation to advance a liberal agenda, that the information elicited was expensive to obtain and not financially material, that the cost of the proposal was “crippling,” that it would deter companies from going public. One of the most interesting discussions was precipitated by questions from Democratic Senator Jon Tester. He remarked 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 would be a tremendous burden. Gensler replied that he understood the concern; he said they were looking at the comments—and there were plenty in this area—and 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. Gensler’s responses made clear that he had heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” Clearly, he recognized that the SEC still had a lot of work ahead. (See this PubCo post.)
How long will it take to sort all of this out? Time will tell. According to a senior director at the Chamber of Commerce’s Center for Capital Markets Competitiveness, quoted by Bloomberg, “‘I can’t see how that process leads to the commission producing a final rule before the end of the year.’ [He] doesn’t expect final rules to be released until the first quarter of 2023. It’s not uncommon for the SEC to need a year or more to finalize major projects, but the commission should be candid with corporate leaders about the shifting timeline, he said.”