The SEC is planning to finalize the closely-watched rule on climate change disclosure rule in the spring of 2023, according to the latest near-term rulemaking agenda unveiled on Jan. 4, 2022.
The head of the SEC sets the regulatory agenda, and Chair Gary Gensler from the get-go has set an ambitious rulemaking plan when he took the helm in April 2021 with almost 50 projects. And the latest agenda continues the aggressive pace as well as the big number of rulemakings.
In addition to the climate rule, the SEC is planning to adopt two dozen rules this year, including special purpose acquisition companies (SPACs) and cybersecurity risk governance for both public operating companies and investment advisers and funds - all three of which are slated for adoption this spring as well.
“I support this agenda as it reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets,” Chair Gensler said in a statement. “Our ability to meet our mission depends on having an up-to-date rulebook - consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.”
He said that taking actions on the agenda will make the $100 trillion capital markets more efficient, resilient and fair, including through rulemakings that were mandated by Congress.
The landmark proposal, issued in March 2022, has attracted significant attention. Businesses do not believe the SEC should prescribe rules that have little to do with a company’s financial performance. But others, including Gensler, believe that times have changed, and this is something that investors want: more useful, consistent and reliable information. And as of Jan. 5 afternoon, 4,464 unique comment letters and 11,434 form letters were submitted.
The majority of the letters support the rule changes, but there are still many opponents.
The proposal in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, does have extensive requirements: disclosures inside and outside the financial statements; greenhouse gas (GHG) emissions disclosures; attestation of disclosures, among others.
For example, companies need to provide climate-related financial information using a 1% threshold, which is below the current threshold used in Staff Accounting Bulletin (SAB) No. 99, which discusses materiality.
Another contentious issue is GHG data. Scope 1 and Scope 2 are about a company’s direct emissions and indirect emissions from purchased energy. Scope 3 is about emissions of other companies in the issuer’s value chain. Scope 1 and Scope 2 must be separately disclosed, expressed both by disaggregated constituent GHGs and in the aggregate, in absolute terms not including offsets, and in terms of intensity - per unit of economic value or production.
For Scope 3, the company must report if it has set a GHG emissions target or goal that includes Scope 3 emissions. This must be in absolute terms, not including offsets, and in terms of intensity. Scope 3 disclosure has been controversial. Companies say that there is no reliable way to measure the emissions, and even making inaccurate disclosures would be costly.
For example, even 353 individual farmers wrote to the SEC, saying that they are worried about spillover effects on them as suppliers to publicly traded companies.
“Recording every drop of fuel, pound of feed and gallon of propane used at each step on the farm will be wildly expensive and burdensome for any farmer to comply with, especially for small family farmers. I am also worried that the proposed rule will be incredibly invasive, forcing farmers like me to hand data over to the SEC that would tell it nearly every single detail about my business,” the form letter notes. “We in agriculture are committed to producing more while using fewer inputs. The best way to achieve this goal is a continuation of voluntary, market-driven approaches, not heavy-handed government mandates such as this proposed rule. To avoid harm to my industry and increased supply chain volatility, I urge the SEC to immediately halt this development of this rule.”
Given strong opposition by companies, experts say that the SEC will make some changes to the proposal before finalizing the rules.
Moreover, Gensler acknowledged that the agency will take into account of the Supreme Court’s decision last year in West Virginia v. EPA.
“We know that’s significant and meaningful, and we look at it within those rulings as well,” Gensler said at a conference in October 2022. “It is the Supreme Court.”
While some legal scholars argue that the high court decision may have little impact on the SEC’s rulemaking, many more believe that - given the current conservative makeup - the Supreme Court court might well rule against the securities regulator as government overreach.
Further, even before the EPA ruling, many critics, including conservative SEC Commissioner Hester Peirce - questioned whether the SEC had the authority to prescribe extensive rules that they view are intended to manage the economy and businesses. The commission’s remit does not include business management or climate policy. Peirce, in her dissent in March, said “we are not the Securities and Environment Commission - at least not yet.”
More recently, at a conservative think tank event in early December last year, Peirce discussed at length the proposed requirements other than the Scope 3 and the 1% financial metric, which have been debated at length.
“These patently difficult requirements may be distracting the public from other requirements proposed in the rule, which also could be extremely challenging from a compliance perspective and of limited or negative value to investors,” Peirce said.
While there are many problems with the proposal, in her speech, she listed only a few: interference and inflexibility; granularity and immateriality; and conjecture and confusion.
Peirce said it is not the SEC’s job to tell companies how to operate, and in her view the proposed rules, if adopted, would do so.
For example, the proposal requires disclosure about board oversight of climate-related risks, including identifying board members or board committees responsible for overseeing climate-related risks along with detailed disclosure requirements of their activities.
Peirce also believes that the SEC’s proposal would inundate investors with insignificant information, taking their attention away from truly important information.
“If the proposal were adopted, climate risk would occupy a lot of space in every company’s SEC filings,” she said. “The resulting disclosure could over-emphasize climate issues and obscure differences across companies.”
In addition, she criticized that much of the proposal is rooted in conjecture even though it is billed as one that will bring consistency, comparability and reliability. And she is worried that this may confuse investors.
“Almost or all of the … granular disclosure requirements around physical risk, particularly over the long-term time horizon, could be of limited use to investors because they will require companies to speculate about fundamentally unknowable risks,” she said as an example.
While it is unclear what the final rule will look like exactly, but a source close to the matter said that the rulemaking could be “split into two - adopt the Scope 1 and 2 emissions and all of the risk/governance disclosure now and save Scope 3 and financial statement impact for a later date.”
“But it all remains to be seen!” the source added.
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