The Securities and Exchange Commission (SEC) has adopted new climate disclosure rules that fall under the ESG sector [environmental, social, and governmental]. The new rules will require reporting companies to disclose their environmental impact, a process that is difficult to measure accurately and will vex most public firms. This will increase the overall cost of disclosures while creating a legion of consultants to help greenwash the compliance process. The Commission has been criticized for acting beyond the agency’s responsibilities of regulating markets and ensuring access to capital and investor protection criteria. Many policymakers have lambasted climate disclosure rules that have exceeded statutory authority.
A document posted by the SEC outlined the requirements for public firms:
“The final rules would require a registrant to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition. Further, to facilitate investors’ assessment of certain climate-related risks, the final rules would require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material; the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses. The final rules would include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.”
Chairman of the SEC Gary Gensler claimed the new climate rules will “enhance the disclosures that investors have been relying on to make their investment decisions,” stating that “issuers and investors will benefit from the consistency, comparability, and reliability of these disclosures.”
Dissenting on the Commission’s decision, Commissioner Hester Peirce issued a statement on the climate rules called “Green Eggs and Spam.” Peirce said the rules’ fundamental flaw is the “insistence that climate issues deserve special treatment and disproportionate space in Commission disclosures.”
While Gensler claimed the rules are rooted in materiality, Peirce differed, explaining that “all reasonable investors value financial returns, but they may diverge on which non-economic considerations are important. A regime rooted in materiality helps companies inform investors without spamming them with information that is irrelevant to the company’s financial picture.”
These words were probably lost upon the Chairman.
Commissioner Peirce added:
“Congress did not create this agency to satisfy the wants of every investor, but to serve the interests of the objectively reasonable investor seeking a return on her capital.”
Peirce pointed out that the cost to comply will be expensive for public companies and their shareholders, who will be paying for the “climate disclosure spam.”
Commissioner Mark Uyeda described the climate rules as a “roadmap for abuse.”
“The Commission is a securities regulator without statutory authority or expertise to address political and social issues. In adopting new disclosure rules, the Commission should understand the informational needs of a “reasonable investor,” stated Uyeda, adding that “… the Commission ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change. If left unchecked, we may see further misuse of the Commission’s rules for political and social issues and an erosion of the agency’s reputation as an independent financial regulator.”
Siding with the Chairman, Commissioner Caroline Crenshaw claimed they must “provide investors the information they need to understand the risks associated with their public company investments in today’s world.”
Commissioner Jaime Lizárraga claimed that investor demand was behind the new rules as this class desired “standardized and comparable information on climate-related risks and impacts.”
Congressman Patrick McHenry, Chairman of the House Financial Services Committee, blasted the new climate rules, stating the SEC is not a climate regulator.
“No matter how badly Chair Gensler wants to inflate his job description, that fact is undeniable. Republicans have consistently warned Biden’s regulators to stick to their knitting for the good of our financial system. With this rulemaking, Chair Gensler continues to make clear a partisan political agenda outweighs the SEC’s statutory mission. Given the substantial changes made since the rule was proposed, the SEC must reissue it for public comment to satisfy the requirements under the Administrative Procedure Act.”
McHenry predicted immense consequences for capital markets and the entire economy. He noted that fewer firms are becoming public and stated that the SEC should make it easier to become a public firm, not more difficult.
“… Chair Gensler is overstepping his statutory authority, piling on massive new compliance costs that will be destructive to workers, investors, and job creators alike. Our capital markets are currently the envy of the world. Unfortunately, with Chair Gensler continuing to implement such disastrous regulations—they may not be for long.”
McHenry said the House Financial Services Committee will be holding a hearing to review the impact of the climate rules and the “gross regulatory overreach.”
While the climate rules may be challenged in Congress under the current administration, there is little chance of a legislative fix. A more viable path may be for the rules to be challenged in the courts, which may be more amenable to recognizing the expansive power grab by the Commission as claimed by the above officials. Politico is reporting that the US Chamber of Commerce has retained Attorney Eugene Scalia to battle the rules.
The rules will become effective 60 days after being published in the Federal Register.
The final document outlining the climate disclosure rules tallies 886 pages. The document is available here.
A Fact Sheet may be viewed here.