Although there is an SEC open meeting scheduled for this week, the commissioners won’t be taking up any proposals from Corp Fin at that meeting (see the agenda). That’s a little puzzling given that the SEC’s agenda for Corp Fin was near to bursting, especially for highly anticipated disclosure proposals on climate and human capital, among other things. Those two topics, for example, had appeared on the two most recent SEC reg-flex agendas with proposal target dates of October 2021, then delayed to December 2021, with expectations later vaguely conveyed for January 2022, unlikely now to be met. [UPDATE: At the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute on Tuesday, Corp Fin Director Renee Jones indicated that said that they expect to have a proposal on climate disclosure before the SEC this quarter.] However, according to Bloomberg, the SEC does have Corp Fin-related plans for this week: to reopen the public comment period on the 2015 pay-versus-performance proposal “after a vote taken behind closed doors.”
An oldie but goodie, the pay-versus-performance rules were originally proposed in 2015 to implement Section 953(a) of Dodd-Frank, which required companies to disclose executive pay for performance. As originally proposed, the rules would amend Reg S-K Section 402 to add Section (v), which would require tabular disclosure of compensation “actually paid” to the principal executive officer and an average of the compensation actually paid to the other named executive officers for a phased-in five-year period. The proposed new section would also require companies to describe, in narrative or graphic form or both, the relationship of the compensation actually paid to the company’s financial performance as reflected in its total shareholder return and to describe the relationship of the company’s TSR to the TSR of a peer group. (See this PubCo post.) But that was the original proposal. The SEC’s latest agenda showed a target date of April 2022 to re-open the public comment period. That was a change from the last agenda, which showed this proposal at the final rule stage, indicating perhaps that the SEC may now be soliciting views on some substantial revisions to the original proposal.
Why this shuffling of agenda items? In these remarks last week before the Exchequer Club of Washington, SEC Chair Gary Gensler observed that he’s “often asked to prioritize the remaining items on our rulemaking agenda. When will we vote on what?” However, he said, “[a]t their core, those questions are more about sequencing than prioritization. Staff is working hard on proposals. When they and my fellow Commissioners think they’re ready, we’ll put them out for public comment and, when appropriate, finalize items. The process is intentionally flexible; it’s about getting proposals right, based upon the economic analysis and our legal authorities, and learning from public feedback.”
Could he perhaps be talking about the expected climate disclosure proposal? As reported by Reuters, with regard to the climate disclosure proposal, SEC staff is “still working on the rule, said two people familiar with the matter, and the SEC’s commissioners, who must vote to propose regulations, have not yet seen a draft.” [Emphasis added.]
According to the article, environmentalist and some activist investors are advocating that the SEC require companies to make broad disclosure about GHG emissions, while business groups “are pushing for a narrower rule that will make it easier and less expensive to gather and report emissions data, and which will protect them from being sued over potential mistakes.”
The article reports that a “major issue staff are struggling with is whether and how some or all companies should disclose the broadest measure of greenhouse-gas emissions, also known as ‘Scope 3’ emissions, according to the sources and company and investor advocates.” Another “big challenge” that the article highlights is “identifying which Scope 3 metrics help investors gauge a company’s financial prospects, and ensuring the rule is flexible enough to generate specific, rather than generic information.”
While activists may view Scope 3 emissions disclosure as “critical,” some companies contend that “there is no agreed methodology for calculating Scope 3 emissions and providing that level of detail would be burdensome.” In addition, they maintain, this information is not necessarily within each company’s control and exposes companies to potential litigation. According to the article, the staff are exploring whether to create a new safe harbor or to rely on the current safe harbor for forward-looking statements. One alternative under consideration is to require some information about Scope 3 emissions to be filed as part of companies’ financial reports and other Scope 3 data to be submitted separately. The article reports that the staff have reached out to advocacy groups such as Ceres and Public Citizen for feedback on Scope 3 issues, including phase-ins and safe harbors. A Ceres representative indicated that the SEC had solicited his views on “whether it should include Scope 3 for large, high-revenue companies, then phase in medium and small-sized companies a year or two later.” The article observes that a mandate to disclose Scope 3 emissions would expand U.S. requirements beyond those of Europe and the voluntary standards of the Task Force on Climate-Related Financial Disclosures, which “proposes companies disclose Scope 3 emissions if material and appropriate.”
The SEC may also be looking at differentiating disclosure requirements by industry sector. For example, the article observes that some “emissions disclosures may be important for carbon-intensive sectors like oil, gas and automakers,” but “less relevant for others and the SEC is considering how much detail companies should provide by sector.” Some companies in carbon-intensive industries may already be feeling the pressure imposed by climate advocates and disclosing Scope 3 emissions. Financial institutions, many of which finance carbon-intensive industries, may also be subject to special attention. How much should they be required to disclose? According to the article, “[m]any banks have pledged to reduce their emissions ultimately to zero, which could have major implications for their operations.”
However the agenda is rejiggered, the SEC is feeling the pressure to put more rulemaking wins up on the board, according to the WSJ. The article indicates that the SEC is behind in crafting new proposals because of the “record surge” in IPOs and de-SPAC transactions, which “created an unexpectedly heavy workload for staff in the division that also writes disclosure rules for companies. One result is that the SEC has taken longer than Mr. Gensler originally expected to propose a rule” for climate disclosure. However, “the clock is ticking for [Gensler] to implement his agenda. With Democrats at risk of losing their thin majorities in the House and Senate after November’s midterm elections, the coming months could be critical for Mr. Gensler, whom President Biden tapped last year. If Republicans win either chamber of Congress, they could move to slow Mr. Gensler’s progress.” For example, they could “threaten to cut the agency’s budget or forbid it from pursuing certain policies via amendments to must-pass pieces of legislation.”
