Here’s a scoop from S&P Global Market Intelligence : apparently, the climate disclosure rulemaking that was targeted for adoption in April 2023 has now been pushed back to the fall. At least that’s the information that former SEC Commissioner Robert Jackson has learned and revealed on a recent webinar. But given the thousands of comment letters and all the controversy over the climate disclosure rules, including pushback from politicians claiming the SEC had no authority to adopt climate disclosure rules, are you really surprised?
According to S&P, Jackson told the webinar audience that he had “‘just understood over the last few weeks that it looks like the rule is going to be pushed back a little further than many had thought, including myself….It [now] looks more like the fall of this year.’ Given the new time frame, financial statements and disclosures under the rule would not be due until 2024, Jackson said.” [My guess is that he really meant 2025, since 2024 was the optimistic original due date in the proposal, assuming an effective date at the end of this year.] Agenda added that Jackson believed there was “good reason” for the delay: “that it’s a crucial rule that requires thoughtful, detailed staff policymaking and they’ve gotten lots of good comments that give them the opportunity to make this rule the best possible rule it can be.” S&P noted that “the SEC did not immediately respond to a request seeking to confirm the latest delay.”
As you know, the SEC’s proposed rules on climate disclosure would require public companies to disclose information about the material impact of climate on their businesses, as well as information about companies’ governance, risk management and strategy related to climate risk. The disclosure, which would be included in registration statements and periodic reports, would draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Compliance would be phased in. The proposal would also mandate disclosure of a company’s Scopes 1 and 2 greenhouse gas 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 proposal would also require disclosure of certain climate-related financial metrics in a note to the audited financial statements. (See this PubCo post, this PubCo post and this PubCo post.)
The controversial proposal has been met with extraordinary legal and political challenges from Congress and the business community. Not to mention that the SEC is faced with the need to provide a nuanced balance of the substantive goals and requirements of the proposal in response to the comments received.
Many members of Congress have stridently objected to the rulemaking. SEC Chair Gary Gensler, testifying before the House Subcommittee on Financial Services and General Government at the end of March, was faced with a subcommittee on a mission about the SEC’s climate proposal. One member even went so far as to suggest that the climate proposal represented a “weaponization” of the SEC.
And Gensler ran a similar gauntlet last year in testimony before the Senate Banking, Housing and Urban Affairs Committee. Although a few Senators favored the SEC’s proposal and strongly encouraged Gensler to proceed, a significant number of Committee members expressed concerns, then-Ranking Member Pat Toomey most ardently. He said that it was no secret that some want to use financial regulation to advance their liberal agendas—a practice he viewed as highly undemocratic because it would be accomplished through the use of unelected bureaucrats. He considered the SEC’s climate proposal to be a prime example. Public companies are already required to disclose material information; in his view, the information elicited by the proposal is expensive to obtain and not financially material. In fact, he stressed, the cost of compliance with the rule was more material than the disclosure itself. These controversial and burdensome rules were outside the SEC’s mission and authority. After West Virginia v. EPA (see this PubCo post), he warned, the SEC should consider itself to be on notice from the courts.
Issues were even raised from the other side of the aisle. Senator Jon Tester said 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 will be a tremendous burden. Gensler replied that he understood the concern; this issue had been raised frequently in comments the SEC received, and they were 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. (See this PubCo post.)
And the climate disclosure proposal has received a bashing from much of corporate America, including trade organizations such as the U.S. Chamber of Commerce. This article in Politico and this article in the WSJ suggested that Gensler was “considering scaling back” the proposal in light of the “intense opposition from corporate America” that it had elicited, including “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.”
In particular, the WSJ reported, “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.
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 reported 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.
And then there is the need for the SEC to strike a fair balance in the final rules. 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. 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 reported, contend that “predicting what the courts will do is impossible and shouldn’t discourage action now.” (See this PubCo post.)
Given the legal and political challenges, along with the need to craft a balanced set of rules—one that would be likely to survive a court challenge—it’s hardly surprised that the process is taking longer than anticipated.
