On Friday, the SEC announced the departure of Renee Jones as head of Corp Fin. She has been Director of Corp Fin since June 2021 and will be returning to her position on the faculty of Boston College Law School. In her place as Director of Corp Fin will be Erik Gerding, who is currently serving as Deputy Director of Corp Fin. SEC Chair Gary Gensler praised Jones for leading Corp Fin “during a time when we have proposed—and in numerous cases adopted—critical reforms to benefit investors….I am grateful for her counsel, judgment, and deep understanding of the capital markets. Thanks to Renee’s leadership, we have enhanced investors’ access to the full, fair, and truthful information as required by our securities laws to make informed investment decisions.” Gerding remarked that he “look[s] forward to continuing the work that Renee led at the Division over the last year….” Will we see any difference in Corp Fin rulemaking? Time will tell.
In light of the billions that even the SEC’s economic analysis estimates would be spent complying with its proposed climate disclosure regulations (see this PubCo post, this PubCo post and this PubCo post), will those disclosures catalyze real climate action? In this recent EY Global Climate Risk Barometer, accounting firm EY analyzed why, notwithstanding the vast amounts spent on climate disclosures, they “are still not translating into practical strategies to accelerate decarbonization.” In fact, EY pointed out, “global energy-related carbon dioxide emissions rose by 6% in 2021 to 36.3 billion tonnes [a metric unit of mass equal to 2,240 lbs], their highest-ever level, according to the International Energy Agency.” Will companies be able to “close the major disconnect between the disclosures they are making” and “their own transformation journeys”? Is integrating climate risk into the financial statements the key? Is climate risk disclosure just a “box-ticking exercise” or, by enabling accountability, can climate disclosures help to accelerate “the decarbonization process”?
At the PLI Securities Regulation Institute last week, the plethora of SEC rulemaking took some hits. It wasn’t simply the quantity of SEC rules and proposals, although that was certainly a factor. But the SEC has issued a lot of proposals in the past. Rather, it was the difficulty and complexity of implementation of these new rules and proposals that seemed to have created the concern that affected companies may just be overwhelmed. Former Corp Fin Director Meredith Cross, a co-chair of the program, pronounced the SEC’s climate proposal “outrageously” difficult, complicated and expensive for companies to implement, and those problems, the panel worried, would only be compounded by the adoption of expected new rules in the EU that would be applicable to many US companies and their EU subsidiaries. (See this Cooley Alert.) The panel feared that companies would be bombarded with a broad, complicated and often inconsistent series of climate/ESG disclosure mandates. Single materiality/double materiality anyone? But it wasn’t just the proposed climate disclosure that contributed to the concern. Recent rulemakings or proposals on stock buybacks, pay versus performance and clawbacks were also singled out as especially challenging for companies to put into effect.
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Here’s a big scoop from Bloomberg: the “SEC is months away from finalizing expansive new climate disclosure requirements as the agency juggles investor demands for more transparency, tech glitches and a tough Republican legal threat.” Are you really surprised though? That was a substantial, complex undertaking that elicited thousands of comments and a lot of pressure from opponents and proponents. Then, in July, came another challenge, as SCOTUS handed down West Virginia v EPA, which, although not directly addressing the SEC’s climate proposal, sure seemed to put a bull’s eye on it. (See this PubCo post.) Not to mention the SEC’s technical glitch, which led to a reopening of the comment period for a couple of weeks until November 1. (See this PubCo post.) That alone would have been enough to smoke the October target date set in the most recent SEC agenda. (See this PubCo post.) But what is real timeframe? Well, who knows. According to Bloomberg, SEC Chair Gary “Gensler has declined to give a timeline for finishing the climate regulations in recent public appearances, repeatedly pointing to thousands of comments that still need to be reviewed.” Bloomberg also reports that SEC “officials in private conversations have given no indication they’ll finish the rules this year, according to several people in contact with the agency.”
Last week, SEC Chair Gary Gensler gave testimony before the Senate Banking, Housing and Urban Affairs Committee. While his prepared testimony largely revisited familiar themes, the Committee’s questioning offered a bit more insight. Committee Chair Senator Sherrod Brown cautioned at the outset that Republicans have “bellyached”—and he assumed would today—about Gensler’s “ambitious agenda,” but added that, “if Wall Street and its allies are complaining,” that means Gensler is doing his job. And right on cue, Ranking Member Senator Pat Toomey cast doubt on recent SEC actions that, he said, raised questions about how well the SEC was handling its responsibility to facilitate capital formation. Where was the SEC, he asked, when some crypto lending platforms “blew up,” resulting in billions in losses? And while the SEC has failed to provide regulatory clarity for the crypto market, he contended, it has instead been busy proposing many controversial and burdensome rules that are 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. In particular, some on the Committee—on both sides of the aisle—took aim at the SEC’s climate disclosure proposal—particularly Scope 3 disclosure—and Gensler’s responses made clear that he heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” But far would those changes go?
“California Approves a Wave of Aggressive New Climate Measures” was a headline in the NYT on Thursday, and that included a “record $54 billion in climate spending, a measure to prevent the state’s last nuclear power plant from closing, sharp new restrictions on oil and gas drilling and a mandate that California stop adding carbon dioxide to the atmosphere by 2045.” But one climate bill didn’t make the cut. That was SB 260, California’s Climate Corporate Accountability Act, which, on Wednesday, failed to pass in the California legislature, notwithstanding much ink being devoted to it this past year (see, e.g., this Bloomberg article). Had the bill been signed into law, it would have mandated reporting and disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” Those requirements for GHG emissions reporting and attestation exceeded even the SEC’s proposed climate disclosure proposal. (See this PubCo post.) And, under the existing broad definition of “doing business” in California, the bill would have captured a large number of companies, estimated to be about 5,500, including many incorporated outside of California. (Nothing new for the Golden State—see this PubCo post and this PubCo post.) According to Politico Pro, Scott Wiener, the sponsor of the legislation, said in a statement that he was “deeply disappointed in this result….If we want to avoid a full climate apocalypse, we need to understand corporate pollution—all the way down the supply chain.” He added that “he ‘won’t give up’ and that he’s ‘very likely’ to reintroduce SB 260 next year.” Time will tell.
In this July report, Responses to the SEC’s Climate Proposal, KPMG discusses various themes and observations that it gleaned from its review of comment letters on the SEC’s 510-page comprehensive and stunningly detailed climate disclosure proposal issued in March. As you probably recall, the proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” KPMG found that the sentiment about climate standard-setting as a general concept was favorable, with 29% of those commenting very supportive and 50% supportive of the concept. Only 21% had a negative response—12% very unsupportive and 9% generally unsupportive. But that positive attitude toward the general concept did not necessarily translate to support for the specific proposal from the SEC.
West Virginia v. EPA: SCOTUS gives its imprimatur to the “major questions” doctrine, shaking up the “administrative state”
West Virginia v EPA, the next-to-final decision handed down by SCOTUS this term, is a significant decision regarding a rule that the EPA said was never even in effect, that it had no intention of enforcing and that it planned to later replace with a new still-to-be-developed rule. As the NYT phrased it, “it’s a case about a regulation that doesn’t exist.” (Sort of like an episode of Seinfeld—the show about nothing—except that it’s not the least bit funny.) So SCOTUS could have stopped right there, but the Court forged ahead—an indicator by itself—with a decision that is nevertheless shaking up administrative law and the extent of rulemaking authority that federal agencies have—or thought they had. Its impact will likely be felt, not just at the EPA, but also at many other agencies, including the SEC. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state.” (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) With this new decision by the Chief Justice (joined by five other justices), that desire has now been sated—for a while at least. In the majority opinion, SCOTUS declared that this case “is a major questions case,” referring to a judicially created doctrine holding that courts must be “skeptical” of agency efforts to assert broad authority to regulate matters of “vast economic and political significance,” requiring, in those instances, that the agency “point to ‘clear congressional authorization’ to regulate.’” In addition to the blow that the decision deals to climate regulation—“Court Decision Leaves Biden With Few Tools to Combat Climate Change,” is one of the headlines from the NYT—we can now expect the major questions doctrine to be brandished regularly against significant agency regulations across the board, and, with Congress perpetually at loggerheads and limited in its ability to authorize much of anything these days, it could well stymie much agency rulemaking. Does anyone question that, with SCOTUS’s new imprimatur, the doctrine will be raised in anticipated litigation against whatever version of the SEC’s climate disclosure regulation is adopted? As reported by Reuters, when asked by Bloomberg TV on Thursday about the impact of the decision on other agencies, Senator Patrick Toomey “singled out the SEC rule,” claiming that the SEC is “attempting to impose this whole climate change disclosure regime…with no authority from Congress to do that.” To better understand the major questions doctrine, it may be useful to take a closer look at the case.
At a recent meeting of the SEC’s Investor Advisory Committee discussing the SEC’s climate disclosure proposal, a speaker in charge of ESG investing at an asset manager raised the possible risk that companies, faced with a disclosure mandate, would just buy carbon offsets to satisfy investors that they are making progress toward their climate goals. His firm, he said, has been seeing this phenomenon occur, but he thought that the practice could lead to poor outcomes. Companies would probably experience better outcomes, he advised, if they first considered spending those same funds on investments that would actually reduce their carbon footprints. (See this PubCo post. ) What’s that about? While many experts view carbon offsets as essential ingredients in the recipe for net-zero, some commentators worry that they are just part of a “well-intentioned shell game” or perhaps, less generously, a “racket with trees being treated as hostages”? And some think both concepts—essential and racket—may be true in some cases at the same time. Are carbon offsets effective or are they just a way to assuage, as the NYT phrases it, “carbon guilt”?
While the proposed requirement to disclose material Scope 3 greenhouse gas emissions seems to be one of the most contentious—if not the most contentious—element of the SEC’s climate disclosure proposal (see this PubCo post and this PubCo post), two of the SEC’s Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, told Bloomberg that they think it still doesn’t go far enough. They are advocating that Scope 3 GHG emissions data be subject to attestation—like the proposed requirement for Scopes 1 and 2—to ensure that it is reliable. This discussion might just be a continuation—or perhaps a reinvigoration—of an internal debate that reportedly led to delays in issuing the proposal to begin with. As previously discussed in this PubCo post, the conflicts were reportedly between SEC Chair Gary Gensler and the two other Democratic Commissioners, Lee and Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation. One major issue at the time, Bloomberg reported, was whether to mandate disclosure of Scope 3 GHG emissions, which, some companies contended, is not under their control and “unfairly makes companies vulnerable to shareholder lawsuits and government enforcement actions.” Another major point of contention was reportedly was whether to require that auditors sign off on the emissions disclosures. The current proposal may reflect a compromise on these issues, but apparently one that does not sit comfortably with Lee and Crenshaw.