Sharply Divided SEC Approves Climate Disclosure Rule
“The SEC has no role as to climate risk itself, but we do have a role with regard to disclosures,” SEC Chair Gary Gensler said.
A sharply divided U.S. Securities and Exchange Commission (SEC) approved a climate disclosure rule Wednesday after yielding in part to staunch opposition from industry groups that claimed it would be challenging for public companies to disclose greenhouse gas emissions by entities in their supply chain. The commission’s party-line 3-2 vote followed SEC Chair Gary Gensler’s explanation that the agency dropped that part of the proposed disclosure requirement, known as Scope 3, “at this time.”
The final rule will require SEC registrants to disclose material climate-related risks faced by the company and any governance and processes used by the company to manage these climate-related risks. It will also require certain large registrants to disclose information on the company’s direct greenhouse gas emissions (Scope 1) or its indirect gas emissions (Scope 2).
Registrants will be required to file attestation reports covering the required disclosure of Scope 1 or Scope 2 emissions, as well as disclosure of the financial statement effects of severe weather events and other natural conditions. The final rules will include a phased-in compliance period for all registrants, subject to the filer’s status and the content of the disclosure.
“The SEC has no role as to climate risk itself, but we do have a role with regard to disclosures,” Gensler said, citing several examples of where the agency has provided disclosure rules throughout the decades.
“I would say consistent with the agency’s disclosure rules over these decades, today’s final rules are grounded in materiality, and materiality represents a fundamental building block of the disclosure requirements under the federal securities law,” he added. “Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about climate risk.”
Gensler previously said the rule will bring consistency to the market, as the European Union and states such as California have implemented their own climate rules.
The final rule is likely to face legal challenges despite the agency’s efforts to scale back the requirements. California’s recently passed climate disclosure law, which goes beyond the SEC’s rule, is facing a lawsuit brought by the U.S. Chamber of Commerce, which has also expressed strong opposition to the SEC rule.
Republican Commissioners Hester Peirce and Mark Uyeda voted against the rule.
Although the final rule is different from the proposal, it still “promises to spam investors with details about the commission’s pet topic of the day: climate,” Peirce said. “All reasonable investors value financial returns, but they may diverge on which noneconomic considerations are important to them. We lack the expertise to oversee these special-interest disclosures, and only a mandate from Congress should put us in the business of facilitating the disclosure of information not clearly related to financial returns.”
Uyeda called the rule “an extraordinary exercise of regulatory authority by the commission that involves economically and politically significant policy decisions.
“Before requiring disclosure, the commission should assess whether the benefits of the information to the reasonable investor outweigh the costs of producing disclosure,” he added. “Unfortunately, this analysis did not occur for today’s rulemaking.” Uyeda said the commission should have reproposed the rule with a new economic analysis.
With the commission narrowing the final rule, Democratic Commissioner Caroline Crenshaw said important disclosures remain absent from the final rule, but “today’s rule is better for investors than no rule at all.” She added that although the rule has her vote, it does not have her “unencumbered support.”
“Today’s final rule excludes requirements to disclose Scope 3 greenhouse gas emissions, despite comments making it abundantly clear that they represent a key metric for investors in understanding climate risk, particularly transition risk,” Crenshaw said. She added that the agency has “clear authority” under the law to require disclosures that are in the public interest and protect investors.
Similarly, Democratic Commissioner Jaime Lizárraga called the climate disclosure rule no different from the agency’s other disclosure rules. The commission’s statutory mission is designed to “protect investors and foster transparent capital markets by improving the reliability, consistency, and comparability of material climate risk disclosures for investors,” Lizárraga said.
“With the broader interest this rulemaking has received, inevitably some will view it as having gone too far, while others will see it as not having gone far enough,” he added. “An old, familiar saying comes to mind: ‘Must not let the perfect be the enemy of the good.’”
From: National Law Journal