Yesterday, the House Financial Services Committee held a hearing entitled “Beyond Scope: How the SEC’s Climate Rule Threatens American Markets.” Since, as one of the committee members observed, this is their sixth hearing on the SEC and twelfth on climate change, there was a lot of the same old, same old—just from different witnesses. (One Committee member called this topic a “manufactured culture war” that the Committee is relitigating; why was the Committee wasting time on this topic when they should be dealing with the problems in housing?) At the hearing, we heard familiar statements to the effect of: the SEC is just pandering to political interest groups; the rules require “extensive and granular” disclosure of information that many do not view to be material; the rules are outside the SEC’s authority and an instance of “mission creep”; this is an attempt by the Biden administration to use regulation to force on the public the climate agenda that it was unable to get through Congress; the costs will be burdensome especially for smaller companies and will result in higher costs and fewer public companies. Or: investors have been demanding this information; voluntary disclosure is inconsistent, unreliable and not comparable; and many companies will already need to comply with the more rigorous rules of the EU and California anyway, so the cost will not be as great as some fear; the SEC acted completely within its wheelhouse. Sound familiar? But there were some highlights, so let’s hit those.
The panelists providing testimony included former SEC Commissioner Elad Roisman, now in private practice; former SEC General Counsel Robert Stebbins, also now in private practice; Chris Wright, CEO of Liberty Energy, the first petitioner to challenge the SEC’s climate disclosure rules in the Fifth Circuit; Joshua White, Asst. Professor of Finance at Vanderbilt; and Jill Fisch, Professor at U. Pennsylvania School Law School.
[Based on my notes, so standard caveats apply.]
Scope 3. Roisman and Stebbins addressed an issue that has been circulating recently. While, on its face, the rule eliminated the requirement to provide Scope 3 disclosures, are Scope 3 disclosure requirements really gone? For example, if companies need to disclose material targets and goals and describe their progress toward meeting them, what if their goals relate to Scope 3? Won’t they need to discuss it, at least qualitatively? Note that, thecorporatecounsel.net has reported that, in remarks at the ABA Business Law Section’s “Dialogue with the Director,” Corp Fin Director Erik Gerding “confirmed that quantifying Scope 3 emissions in SEC filings is purely voluntary, and that the agency didn’t intend to introduce the possibility of a back door Scope 3 disclosure requirement.” Nevertheless, like the two panelists, the blog suggested that things could get sticky in qualitatively describing progress toward goals—especially given the prescriptive disclosure required in that context—if Scope 3 factors into goals or transition plans. Perhaps Corp Fin will need to speak out more explicitly on this issue in formal guidance?
Timeline. Given that the SEC has stayed the rules, both Stebbins and Roisman thought it would be appropriate for the SEC would adjust the compliance timeline.
Legal challenges. In Stebbins’ presentation, he discussed the legal challenges to the rules, reciting the customary three: arbitrary and capricious under the APA; major questions doctrine; and First Amendment. But he gave us the odds. He thought there was a strong basis to conclude that the rules violate the major questions doctrine because there was no specific authorization by Congress. He thought there was a reasonable basis to conclude that they violated the APA; he believes the SEC should have opened the revised rules for another set of comments, which might have led commenters to focus on different aspects of the rules. A First Amendment challenge, however, was less likely to succeed, in his view. But if it did, it would be “devastating” to the SEC, which depends on compelled speech.
Really about disclosure? Chair Patrick McHenry, while acknowledging that climate change was real and challenging, charged that the SEC is “not a climate regulator” and questioned whether adopting this rule was really within the proper role of the SEC as a securities regulator. He claimed that Democrats’ accusations that Republicans are “anti-science” are simply proving the point that the rule is not about standardizing disclosures, but about fulfilling their climate agenda. He threatened that, if the SEC didn’t abandon its “power grab,” the House would be forced to act, presumably referring to this resolution of “disapproval.”
Bolder. Several Committee members mourned the loss of Scope 3 requirements, wishing the SEC had been bolder.
Prescriptive rules. Roisman said that the level of prescriptive disclosure required was “unlike any other rules” he had seen. If rules are overly prescriptive, he said, it can lead to the federalization of corporate governance, pushing boards to act in a certain way to effectuate specific changes, such as reaching net zero. That’s not the SEC’s job. There aren’t prescriptive rules for interest rate or inflation risks. His concern was that the rules elevate climate risks above others. While prescriptive rules are supposed to make the disclosure more comparable, he questioned whether that would be the case: there may be standard line items, but they will be based on different assumptions and different definitions, so the comparisons will not really be apples to apples. Several Committee members questioned whether that plethora of information is even helpful to retail investors? Can they understand it or is it just overwhelming—“spamming” investors as Commissioner Hester Peirce suggested? One Committee member responded that it will help retail investors through intermediaries, such as investment funds.
Materiality. Fisch noted that the disclosure rules were the subject of overwhelming investor demand. The information elicited was important not only for investment decisions, but also for voting decisions on the quality of director oversight and on shareholder proposals. In addition, the information required is financially material because climate change could lead to economic vulnerability, causing companies to potentially lose their insurance as well as their assets. In addition, she said, the rules prioritize where there is the greatest potential for greenwashing, such as around targets and transition plans. Investors spend significant amounts on research costs, which these rules would reduce. The rules will produce more efficient markets, she said, by letting investors assess companies’ material risks and preventing information asymmetry. Stebbins said that companies already need to report material information.
Liberty Energy. Wright said that, while the SEC plays a critical role, here they have strayed outside their lane. He was not aware of any requests for this data from his company’s investors. If the temperature increased by 2% as predicted by the end of the century, he claimed, it wouldn’t affect his company’s operations. He also cited a UN panel that said that there was no significant growing threat in weather extremes. The climate risk that he saw was in the SEC rules, which make it costlier and riskier to produce oil. Companies will face more litigation, especially because much of the information required cannot be precisely measured. In fact, he said, because of the higher costs and burdens in this country, production here will decrease, demand will remain and imports will increase from certain countries that will actually lead to an increase in emissions. In his view, the rules reflected a poor calculus of risk and benefit. In response, one Committee member called it b.s. Some committee members discussed wildfires, losses of insurance and other vulnerabilities caused by climate change, potentially leading to trillions of dollars of loss.
Costs. Even the SEC said that compliance costs would increase an average of 21%. White suggested that the SEC had likely underestimated, given that, for SOX, the costs turned out to be 350% higher than estimated. One Committee member said the SEC had failed to consider the cumulative costs of compliance; rules do not operate in isolation. Small companies are exempt from just some of the requirements, but the exemption was too narrow, one Committee member said. White said that the rules would not only raise direct costs but also have spillover effects on jobs and in other areas. He referred to an economic analysis that showed the granular disclosures were not economically material and found disclosures of Scope 1 and 2 did not have a material impact on stock price. Companies will need different policies and procedures to track information in different countries, especially given the low threshold for disclosure (presumably in the financial statements). Cost increases of that size can lead some companies to close their doors, a committee member said; many companies don’t have that kind of margin. The rules could destroy value, deter companies from going public and cause companies to migrate to other jurisdictions (although he didn’t suggest where that might be). Roisman contended that, while other jurisdictions may require the same or more rigorous disclosures, they aren’t subject to the same liability as SEC filings in the U.S.
