SEC dials back final climate disclosure rules

We’ve been trying to read the tea leaves for two years now, speculating about where the SEC’s final climate disclosure rules might land, especially as criticism about the proposal from the corporate sphere and from Congress intensified, and snippets about the contents of the final rule leaked to the press.  This conjecture is now at an end: yesterday, by a vote of three to two, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.”  If you tuned in to the SEC’s open meeting yesterday—with over two hours devoted to the climate rules—you didn’t see a lot of happy faces. The dissenters (Commissioners Hester Peirce and Mark Uyeda) thought the rule was unnecessary and went too far and Commissioner Caroline Crenshaw thought the final rule didn’t go far enough, but was barely acceptable as a “floor” for disclosure. Only SEC Chair Gary Gensler and Commissioner Jaime Lizárraga seemed to think that the balance was about right. Apparently, a coalition of attorneys general from ten states isn’t very happy either. Law 360 is reporting that the group immediately petitioned the Eleventh Circuit to review the new climate rules. (See the SideBar below.)

The disclosure, which will be included in registration statements and annual reports, will draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The new rules will require public companies to disclose information about the material climate-related risks, companies’ governance, risk management and any material climate-related targets or goals, as well as disclosure of the financial statement effects, such as costs and losses, of severe weather events and other natural conditions. Importantly, as widely rumored, in response to public feedback, the SEC has jettisoned the mandate for Scope 3 GHG emissions reporting;  the final rules require disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers when those emissions are material.  Companies will also be allowed more time to file their emissions disclosures. Attestation will also be phased in.  According to Gensler,

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’….Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements….These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Here are the final rules—886 pages!—the fact sheet and the press release. I hope to publish an update to this post with more detail about the final rules at a later time.

Background

Disclosure about various environmental matters has been required for 50 years, and the SEC has attempted to elicit climate-related disclosure for over 14 years. Nevertheless, many have viewed the current regulatory regime as ineffective in eliciting appropriate climate disclosure. As described in this 2021 report from the Institute for Policy Integrity at NYU and the Environmental Defense Fund, two years after the issuance of the 2010 guidance, the SEC reported to Congress that it had not seen a noticeable change in disclosure as a result of the guidance.

And that state of affairs largely continued in periodic reporting, even in the face of the development of numerous voluntary frameworks and standards. Indeed, the SEC contended, to some extent, the proliferation of frameworks under private ordering made reporting more difficult and contributed to fragmentation. Because they are voluntary, the proposing release had maintained, “companies that choose to disclose under these frameworks may provide partial disclosures or they may choose not to participate every year. In addition, the form and content of the disclosures may vary significantly from company to company, or from period to period for the same company.” Various studies “found a lack of transparency and standardization with regard to the methodologies companies apply in disclosing climate-related information.” Because much of the disclosure appears outside of SEC filings, the SEC observed, it is harder for investors to locate and compare this information. In addition, it is not subject to disclosure controls and procedures or to the same level of “additional potential liability, which itself can cause registrants to prepare and review information filed in the Form 10-K more carefully than information presented outside SEC filings.” (See this PubCo post.)

Things began to change in February 2021, when then-Acting SEC Chair Allison Herren Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies addressed the topics identified in the 2010 interpretive guidance. The staff would also “assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.”  (See this PubCo post.) Lee also issued a statement in March 2021 requesting public input on climate disclosure, observing that, since the 2010 guidance, investor demand for climate disclosure has increased dramatically, and questions have arisen about “whether climate change disclosures adequately inform investors about known material risks, uncertainties, impacts, and opportunities, and whether greater consistency could be achieved.” According to Gensler, 600 unique comment letters were submitted in response and were beneficial in developing the proposal.

The SEC issued its proposal in 2022. The proposal drew about 24,000 comment letters, Gensler announced at the meeting, including 4,500 unique letters, with some commenters seeking more detail, reliability and consistency, and others expressing concerns about costs and resources. For example, some commenters “stated that, as governments and registrants have increasingly made pledges and enacted laws regarding a transition to a lower carbon economy, more consistent and reliable climate-related disclosure has become particularly important to help investors assess the reasonably likely financial impacts to a registrant’s business, results of operations, and financial condition in connection with such governmental pledges or laws and the related financial and operational impacts of a registrant’s progress in achieving its publicly announced, climate-related targets and goals.” Other commenters either opposed the rules in their entirety, contending that the SEC lacked authority to adopt them or that the rules were unnecessary, or argued that the proposal was overly prescriptive or not limited by materiality.  Many opposed specific aspects of the proposal, such as the Scope 3 requirement or  the proposed financial metrics required  under Reg S-X. In crafting the final rules, the SEC sought to balance these various concerns.  

As Gensler observed at the meeting, a lot has changed since 2010, with more investment decisions based on climate-related risk and more companies making climate-related disclosures. About 90% of companies in the Russell 1000 provide climate-related information and 60% provide GHG information. However, they provide that information primarily in sustainability reports, not in periodic reports subject to the rigor of SEC filing requirements.  In this context, Gensler remarked, the SEC has

“a role to play with regard to climate-related disclosures. Our vote today is on rules, not just guidance, and ones that require disclosures be filed, not just posted online. Today’s rules enhance the consistency, comparability, and reliability of disclosures. The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today. Further, the final rules require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements. Bringing them into the filings will help make them more reliable. There are standard controls and procedures for filings unlike for sustainability reports.”

The final rules

According to the fact sheet, companies will need to disclose:

• “Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
• For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.”

Some of the changes to the rules were highlighted in the adopting release, including:

• “Adopting a less prescriptive approach to certain of the final rules, including, for example, the climate-related risk disclosure, board oversight disclosure, and risk management disclosure requirements;
• Qualifying the requirements to provide certain climate-related disclosures based on materiality, including, for example, disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price;
• Eliminating the proposed requirement to describe board members’ climate expertise;
• Eliminating the proposed requirement for all registrants to disclose Scope 1 and Scope 2 emissions and instead requiring such disclosure only for LAFs and AFs, on a phased in basis, and only when those emissions are material and with the option to provide the disclosure on a delayed basis;
• Exempting SRCs and EGCs from the Scope 1 and Scope 2 emissions disclosure requirement;
• Modifying the proposed assurance requirement covering Scope 1 and Scope 2 emissions for AFs and LAFs by extending the reasonable assurance phase in period for LAFs and requiring only limited assurance for AFs;
• Eliminating the proposed requirement to provide Scope 3 emissions disclosure (which the proposal would have required in certain circumstances);
• Removing the requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant’s consolidated financial statements;
• Focusing the required disclosure of financial statement effects on capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions in the notes to the financial statements;
• Requiring disclosure of material expenditures directly related to climate-related activities as part of a registrant’s strategy, transition plan and/or targets and goals disclosure requirements under subpart 1500 of Regulation S-K rather than under Article 14 of Regulation S-X;
• Extending a safe harbor from private liability for certain disclosures, other than historic facts, pertaining to a registrant’s transition plan, scenario analysis, internal carbon pricing, and targets and goals;
• Eliminating the proposal to require a private company that is a party to a business combination transaction, as defined by Securities Act Rule 165(f), registered on Form S-4 or F-4 to provide the subpart 1500 and Article 14 disclosures;
• Eliminating the proposed requirement to disclose any material change to the climate-related disclosures provided in a registration statement or annual report in a Form 10-Q (or, in certain circumstances, Form 6-K for a registrant that is a foreign private issuer that does not report on domestic forms); and
• Extending certain phase in periods.” 

Companies will be required to include the climate-related disclosure in registration statements and Exchange Act annual reports.  A company must include the climate-related disclosures required under Reg S-K either in a “separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis, or, alternatively, by incorporating such disclosure by reference from another Commission filing as long as the disclosure meets the electronic tagging requirements of the final rules.” The  climate-related disclosures must also be electronically tagged in Inline XBRL.

The rules will be phased in depending on filer status and the content of the disclosure. According to the fact sheet, there are a number of special accommodations:

• “Additional phase-in periods for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement, and the electronic tagging requirement if the registrant is an LAF (see compliance date table);
• A safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals;
• An exemption from the GHG emissions disclosure requirement for SRCs and EGCs; and
• An accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis as follows:
  • If a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates;
  • If a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant; and
  • If filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.”

The final rules will become effective 60 days after publication in the Federal Register.  Set forth below is the SEC’s compliance phase-in table:

Compliance Dates under the Final Rules1
Registrant Type	Disclosure and Financial Statement Effects Audit		GHG Emissions/Assurance			Electronic Tagging
	All Reg. S-K and S-X disclosures, other than as noted in this table	Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2)	Item 1505 (Scopes 1 and 2 GHG emissions)	Item 1506 – Limited Assurance	Item 1506 – Reasonable Assurance	Item 1508 – Inline XBRL tagging for subpart 15002
LAFs	FYB 2025	FYB 2026	FYB 2026	FYB 2029	FYB 2033	FYB 2026
AFs (other than SRCs and EGCs)	FYB 2026	FYB 2027	FYB 2028	FYB 2031	N/A	FYB 2026
SRCs, EGCs, and NAFs	FYB 2027	FYB 2028	N/A	N/A	N/A	FYB 2027
As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed. Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.

At the open meeting

In his statement, in addition to remarks quoted above, Gensler sought to set this rulemaking in the context of, in his view, a long history of similar rulemakings—decades of rulemakings over which the SEC’s authority had not been questioned.  “Over the last 90 years,” he observed,

“we have updated, from time to time, the disclosure requirements underlying the basic bargain and, when necessary, provided guidance with respect to those disclosure requirements. We did it in the 1960s when we first offered guidance on disclosure related to risk factors. We did so in the 1970s regarding disclosure related to environmental risks.  We did so in 1980 when the agency adopted Management’s Discussion and Analysis (MD&A) sections in Form 10-K. We did it again in the 1990s when we required disclosure about executive stock compensation. And we did it as well when the Commission issued 2010 Climate Guidance about climate-related risks faced by public companies. Of course, there was lively debate about each of these disclosure requirements. Today, though, they have become integral to our disclosure regime, and it’s hard to imagine investors not having access to them. There also has been lively debate about today’s climate rule.” 

He also focused on the SEC’s effort to ensure that, like the SEC’s other rules above, “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.” In his view, the “rules will enhance the disclosures that investors have been relying on to make their investment decisions. Issuers and investors will benefit from the consistency, comparability, and reliability of these disclosures.”

After reading her lengthy dissenting statement, Peirce peppered the staff with what seemed like hundreds of questions. In her view, although the final rule included a number of moderating changes from the proposal, “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.” The SEC, she said, does not provide “concrete evidence” that the existing rules and guidance, together with the Corp Fin comment process, are inadequate. The rule, she contended, “replaces our current principles-based regime with dozens of pages of prescriptive climate-related regulations. While the Commission has decorated the final rule with materiality ribbons, the rule embraces materiality in name only”: there are numerous requirements for “granular disclosure” and “absurdly low de minimis thresholds.” 

In addition, instead of continuing “a principles-based regime grounded in materiality,” the SEC, in adopting these rules, “could trigger a hodgepodge of requirements tailored to meet the demands of a vast and ever-expanding panoply of special interests,” any of whom “might want idiosyncratic information to assess a company’s performance on those respective issues.” Even if “well-intentioned, these particularized interests do not justify forcing investors who do not share them to foot the bill. Congress did not create this agency to satisfy the wants of every investor, but to serve the interests of the objectively reasonable investor seeking a return on her capital. We lack the expertise to oversee these special interest disclosures, and only a mandate from Congress should put us in the business of facilitating the disclosure of information not clearly related to financial returns.”

Changes to the rule notwithstanding, compliance will still be expensive, she argued, requiring the development of new internal controls and disclosure controls, and probably the engagement of experts and counsel, not to mention the “indirect costs of lost management time, board distraction, and disruptive changes in company operations.” That would be the case, she contended, even for companies that end up making a non-materiality determination. (She also noted that, while elimination of Scope 3 should help those small companies and farmers in the supply chain, they may not be completely off the hook: “companies must still disclose supply chain risk if it ‘has materially impacted or is reasonably likely to materially impact’ the company.”

In her view, the benefits of the rule are illusory: “a closer inspection brings us crashing back to the reality that many climate disclosures are high-priced guesses about the present and future. Measurement and reporting are not standardized within companies, let alone across companies. Attempts to treat climate data on par with financial data are strained. Despite ongoing efforts to improve climate data collection and analysis, they are still imprecise.” Underlying “authoritative-looking results” will be “layers of assumptions and extrapolations. Different companies will take different approaches to resolving these uncertainties, which will undermine comparability.” She would have preferred the current rules to continue: “over time, companies likely would coalesce around approaches that generated reliable and comparable disclosures. Letting that process play out organically would be superior to the top-down approach we are embracing today.” Although the SEC claims to be merit-neutral regarding

“how public companies should think about climate risks, the prescriptive nature of this new climate regime will affect corporate behavior. Through an extensive set of leading disclosure items, the Commission steps into the shoes of the corporate board, nudges corporate decision-making, and distorts corporate supply chains. These new disclosure requirements are rooted in what ‘the Commission believes should matter to investors.’ The Commission is forcing individual public companies to operate in a conduct-altering disclosure regime that may have no direct relevance to their situation. The Commission argues that it is well within its authority in adopting this rule, but the argument we make for our authority here has no limiting principle.” 

Among her questions were whether, in the future, the staff plans to consider going back and assessing the accuracy of its estimates (ans: yes, the staff will consider); how long will it take for climate reporting to be as consistent, reliable, and comparable as financial reporting; whether, given the speculative nature of GHG emissions disclosure, this isn’t “a new kind of rule here, and perhaps one for which we have no statutory authority” and with unique enforcement challenges (ans: the SEC has long required detailed disclosure regarding risk); whether the rule presents a number of interpretive challenges in assessing whether certain activities fall within the rule (ans: companies will need to make decisions about the application of the rule just like any other rule) and more.

While Crenshaw voted in favor of the rule, her statement made clear that she was far from satisfied with it.  After a nod to former Acting Chair Allison Herren Lee for initiating this process, Crenshaw observed that the intense focus on this proposal by the media and the public has steered the conversation “away from the true purpose of our proposal: we proposed this rule to benefit investors who, at the end of the day, are people” investing for the future. “Investors,” she said, “are at the heart of today’s rulemaking, and it is critical that we give them the information they need to properly assess the risks that underlie the value of their hard-earned savings. They are entitled to consistent, comparable, and reliable climate risk disclosures—and many investors have been calling for such disclosures for years.” Current disclosure on climate provides “costly, inconsistent, disparate, and, at times, unreliable data without clearly disclosed methodologies for how these data are calculated. Today’s rule finally begins to change that. As you have heard from the staff, it establishes a floor for a disclosure framework that will provide investors with climate risk information, help inform investors’ investment decisions, and be subject to the rigor of Commission filings.”

While some of the data, such as GHG emissions, “may be classified by some as non-financial,…commenters emphasized that emissions disclosure is an invaluable proxy for financial risk. These disclosures serve such an important role because, among other things, they are quantitative and comparable across companies.”  Disclosure about “expenditures provides fundamentally important insight into how a company is managing risk and whether and how expenditures align with qualitative disclosures and stated plans, targets, and goals.”  The rules’ new requirements “move a haphazard potpourri of public company disclosures into the Commission’s well-developed and standardized filing ecosystem.”

Nevertheless, she lamented, “this is not the rule I would have written. While these are important steps forward, they are the bare minimum. Ultimately today’s rule is better for investors than no rule at all, and that is why it has my vote. But, while it has my vote, it does not have my unencumbered support. And, although I am loath to leave for future Commissions those obligations that I see as our responsibilities today, I’m afraid that is precisely what we are doing.” In her view, important disclosures were omitted from the proposal for which there was “clear legal authority” and robust public (including company) demand, including more robust GHG emissions reporting and transition-related expenditure disclosure in the financial statements. She also objected to the materiality qualifiers regarding GHG emissions and the elimination of Scope 3 reporting, which she considered a valuable metric for investors. She also regretted the absence from the rule of expenditure reporting, replaced in the final rules with an “unnecessarily limited version.”

Why were these changes made, she asked?  One argument was that the SEC lacked authority.  But, in her view, the SEC “has clear authority under the Securities Act and the Exchange Act to require disclosures that are in the public interest and for the protection of investors, as today’s rule is. This well-established authority has been consistently relied upon, and affirmed and reaffirmed across dozens of disclosure rulemakings over multiple decades. And, this authority would have supported a more robust rule.”  First, she argued, “our public company disclosure regime is meant to be updated as markets innovate and investor demand changes.” The SEC has provided numerous rule updates and additions over time.  Second, she argued, “SEC rules have consistently required disclosure of risks, even when the metrics related to those risks are labeled by some as not strictly financial, such as the GHG emissions discussed above.” In both cases, the SEC’s actions  “are entirely consistent with existing precedent.” Rolling back the proposal, she contended, “is a missed opportunity,” and she hoped a future SEC would “rise to the occasion.”

She added her recommendation that the SEC “issue an order to recognize alternative regulatory regimes that would satisfy compliance with the rule….An order recognizing such a regime would not only respond to investors, but also to the many corporate commenters who favored such an approach.” She also advised that, after adoption, the SEC “review the effectiveness of this disclosure regime” and, if insufficient, consider guidance or other action to address the inadequacies.

In conclusion, Crenshaw borrowed from Romeo and Juliet. She noted that the critiques

“about our rulemaking attempt to disguise our authority as something that it is not. It is said that we are not an environmental agency and that we should not be in the business of supporting green agendas or setting pollution standards. Those statements are true. But, we are in the business of requiring public company disclosure about risk. We have done it myriad times without having our authority questioned…. That the term ‘climate’ has become a buzz word should be of no moment to a clear-eyed Commission. It should not compel us to shy away from our duties and obligations to investors. Indeed, a risk by any other name of such import to public company investors would be worthy of Commission rulemaking, and so too is this.”

In his dissenting statement, Uyeda argued that, denials that the SEC is a climate regulator aside, his advice to investors in this context was “do not rely on the marketing materials and read the prospectus instead. By the time you finish reading all 886 pages of today’s release, you will conclude that this rule is climate regulation promulgated under the Commission’s seal.”

In his view, this new rule “is the culmination of efforts by various interests to hijack and use the federal securities laws for their climate-related goals.”  The roadmap of these interests, Uyeda explained, is to buy shares to “force companies to disclose information related to political and social issues important to them but that may not be relevant to those companies’ business or shareholders generally.” After some companies relent and disclose, they cite investor demand and ask the SEC to adopt new rules. Going a step further, Uyeda argued, “[c]iting such ‘investor demand’ for the information and the need to have ‘consistent and comparable’ disclosure, a politically-oriented Commission might pursue such a rulemaking. If it does, then the result is using disclosure not as a tool to aid investors, but to bypass Congress to achieve political and social change without the corresponding accountability to the electorate.”

But, he argued, the SEC is “a securities regulator without statutory authority or expertise to address political and social issues.” As the courts have said, “disclosure policy embodied in regulation is ‘not without limit.’” An analysis of the costs and benefits is required: “Unfortunately, this analysis did not occur for today’s rulemaking. Instead, the Commission ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change. If left unchecked, we may see further misuse of the Commission’s rules for political and social issues and an erosion of the agency’s reputation as an independent financial regulator.” Although “[t]here are many important political and social issues facing the country, … the place to resolve those concerns is in the halls of Congress, not the Commission.”

He also questioned the SEC’s authority to adopt these rules in light of the “major questions” doctrine, in which SCOTUS “made clear that a ‘colorable textual basis’ may be insufficient to support an assertion of regulatory authority”; “in extraordinary cases—which I believe includes today’s rule—an agency… must point to ‘clear congressional authorization’ for the power it claims.”  The SEC “does not articulate any limiting principle for its claimed authority and why today’s rule is within that limiting principle. Perhaps the Commission does not believe that there are limitations.” 

Uyeda further contended that the process has been flawed; the final rule is significantly different from the proposal and, as a result, the SEC should have reproposed the rule, allowing the public an opportunity to focus more on aspects of the rule that survived and providing an updated economic analysis.

He also expressed concern about the opportunity cost involved;  by compelling managements, boards, lawyers and accountants “to spend more time and resources on climate discussions, the Commission creates the risk that companies may ignore, or not pay sufficient attention to, other matters that could have greater and more immediate impacts.”  In addition, companies “will have a duty to provide prescriptive, climate-related disclosure knowing that any non-disclosure, including assessments of materiality, will be judged in hindsight…. The takeaway is that climate will be nearly everything, everywhere, all at once for public companies. The primary financial beneficiaries of today’s rulemaking will be the ESG consultants, auditors, attestation providers, and attorneys who will advise on compliance with the new provisions. Keep in mind that not one dime of money spent on compliance will be used for actual reductions in GHG emissions, and that shareholders will be footing this bill.”

Finally, he objected to the limited nature of the exemptions for EGCs and the failure of the SEC to defer, for FPIs, to the disclosures made under home country reporting requirements. 

In his statement, Lizárraga argued that, over nine decades, the SEC has expanded its disclosure requirements many times, and the “climate-related disclosures we are advancing today are no different from many of the Commission’s existing disclosure requirements.” The new rules respond to investor demand for standardized and comparable information, he contended. In addition, the “connection between climate-related risks and a company’s fundamental value is well-established, as highlighted by studies cited in the Commission’s release. These risks play out through differences in revenues, operating income and expenses, cash flows, capital structures, asset prices, debt performance, and investment policies.” While many companies already provide climate-related disclosure, “under the status quo, investors would continue to face a patchwork of disclosures, with a limited ability to conduct apples-to-apples comparisons.”

In addition to standardized climate risk-related disclosures, the “final rule will also provide investors with more liability protections than they receive today. In contrast to voluntary disclosures, the Commission will treat climate risk information in registrants’ annual reports and registration statements as ‘filed.’ This means that registrants can be liable under Section 18 of the Exchange Act, or Section 11 of the Securities Act, for any materially false or misleading statements. Such treatment will prevent greenwashing and place climate risk disclosures on the same footing as other information that registrants disclose under Regulations S-X and S-K.”

In the rulemaking process, SEC and its staff “considered a wide range of commenters’ feedback in its deliberations,” undertook a thorough analysis of this feedback,” and “crafted a final rule that appropriately balances all of the input with the rule’s policy goals.” That balance and careful analysis is reflected in changes to the rule.  For example, “[m]indful of concerns expressed around data collection, as well as possible indirect burdens on entities outside of the Commission’s purview, the final rule does not require disclosure of Scope 3 GHG emissions.”

He concluded that “the final rule is a product of the Commission’s standard exercise of its basic authority to require full and fair disclosure by public companies to investors. It embodies a time-tested approach based on traditional notions of materiality familiar to the Commission’s registrants and to market participants…. In short, the Commission is doing what it was designed to do: protect investors and foster transparent capital markets by improving the reliability, consistency, and comparability of material climate risk disclosures for investors.”