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.’”
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.”
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.
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.”
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.’”