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US Securities and Exchange Commission

Commissioner Crenshaw Says SEC is Not a Merit-Based Regulator in Response to Climate Rulemaking Criticism

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The Securities and Exchange Commission’s rulemaking effort on a climate change disclosure rule has garnered a lot of attention and even sparked discussions around what the commission’s mission is because some have argued that the agency is going outside its remit of regulating the securities market. And during a speech at a recent conference, SEC Commissioner Caroline Crenshaw—who has supported the rulemaking—pushed back against claims that the commission is stepping into another agency’s territory.

“In the time since the proposal, there have been demonstrably false assertions that the SEC is acting as an environmental regulator, is seeking to decarbonize the economy and is crossing a line in terms of its authority with this type of regulatory action,” Crenshaw said during the inaugural ECGI Responsible Capitalism Summit in Brussels, Belgium, on Oct. 21, 2022. Caroline was talking about the SEC’s proposal issued in March in Release No. 33-11042The Enhancement and Standardization of Climate -Related Disclosures for Investors. The rulemaking has extensive requirements: disclosures inside and outside the financial statements; greenhouse gas emissions disclosures; attestation of disclosures, among others.

But 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.”

In rebutting Peirce’s claims, Crenshaw pointed out that “as a factual matter,” the proposal is only about information that public companies should provide so that investors can make better capital allocation decisions.

“It neither usurps a board’s business judgment, nor does it seek to nudge behavior into a normative outcome, regulate the environmental impact of companies, or restructure the capital markets,” Crenshaw said. “These disclosures are not designed to move markets or impact climate change.”

She emphasized that this is something that investors have said they want.

“Public and private funds, asset managers, index providers, among others, have demanded information on risks related to climate so they can fulfill their disclosure, fiduciary or other obligations to investors. In other words, investors turn to these data to help inform their investment decisions,” Crenshaw said.

Thus, the rulemaking is designed to standardize disclosures so that investors can more easily and effectively make voting decisions on matters related to the environment.

This type of rulemaking is not new, Crenshaw emphasized, and it is part of the work that the SEC has been doing for decades to protect investors and fulfill all objectives of its tri-partite mission. The other two missions are maintaining fair, orderly and efficient markets and facilitating capital formation. And advancing its remit is something that the SEC very takes seriously, she said.

“This proposal has not been advanced on a whim or impulse,” she said. “We have engaged in a careful, calibrated, deliberate process that includes decades of market observation, guidance to the industry, a request for input, and, now, a proposed rule.”

She said it is similar to the process the SEC has used to address other market developments in the past. For example, she said that the commission studied and drafted rules related to “hot issues” in the 1970s. At the time, there was optimism and speculative interest in certain initial public offerings (IPOs), which were called “hot issues” at the time.

The SEC at the time worked with the National Association of Securities Dealers, to examine problems related to these offerings. After identifying disclosure gap, the SEC wrote a rule to change registration statements and periodic reports.

The goal back then was to require meaningful disclosure for investors. Similarly, it’s climate-related disclosures today, she said.

“The SEC’s proposal … identified gaps in disclosure in the voluntary climate risk reporting regime,” Crenshaw said. “After decades of staff experience, a thorough dialogue with the public, through Acting Chair Lee’s Request for Input, and now through the notice-and-comment rulemaking process, the SEC is seeking to ensure that the continuous disclosure system is responding to investors. The Commission did not rely on a new or expansive theory of corporate governance when it formulated the climate-related disclosure proposal. Rather, the proposal originated as a careful response to our age-old statutory mandate. Simply put, this proposal is squarely within the SEC’s remit to promulgate disclosure rules for the protection of investors.”

In her view, whether investors allocate capital to companies that want to aggressively reduce carbon footprint or select companies that have high-emissions is irrelevant to the rationale behind the proposal because reduction of greenhouse gases is not the reason for the rulemaking

“It is not my job as a commissioner to dictate to shareholders what they should want,” she said.

In addition, she pointed out that the markets have already moved, and the SEC is just following. Many companies already do provide voluntary disclosures. For example, they claim that they are becoming carbon neutral or advertise how earth-friendly they are.

“But there is a problem: the disclosures are made with varying degrees of specificity, standardization and, sometimes, with unreliability,” Crenshaw said. “Investors have said they do not have the ability to understand and track how strategies are being implemented.”

Peirce: Not So Fast

At a separate event on Oct. 31, Commissioner Peirce maintained that it is not that easy to provide consistent and decision-useful information related to climate change in response to a question whether the SEC ought to leave the issue for the private sector to figure it out. Many businesses believe that the market works well on its own without much regulatory intervention, and Peirce agrees.

Regulatory standards are difficult on markets, Peirce said during Coalition Greenwich’s Behind the Market Structure event.

“When you look at the climate rule, and you look at the attempt to provide clarity, accuracy and consistency, but then you look, you lift the cover and look underneath that, you see that you’re not really going to get clarity, consistency and accuracy,” said Peirce, who is a famous advocate of free enterprise. “But maybe people will be able to tell themselves that they have that because these disclosures will be baked into SEC filings. So, that puts issuers at great legal risk. And I think it is better to let some of this play out in the market as investors and issuers come together in different industries and figure out what kind of information they want to see.”

In her view, the SEC’s disclosure rules in general work well to elicit material information from companies, including material risks, which might include for some companies, climate change and human capital risks. Thus, “that’s how I like to see it play out.”

 

This article originally appeared in the November 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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