At an event hosted by the U.S. Chamber of Commerce, it was clear that a potential lawsuit by the business lobby was in Securities and Exchange Commission (SEC) Chair Gary Gensler’s mind during a mostly serious 30-minute fireside chat with a bit of banter about the commission’s efforts to finalize the climate change disclosure rule.
“Wait, are you already suing us? I just walked in,” Gensler interjected at around the midpoint of the fireside chat, sparking laughter from the audience when event moderator Thomas Quaadman was talking about different rules that were recently written, including the European Union’s Corporate Sustainability Reporting Directive, the International Sustainability Standards Board’s sustainability standards and California’s climate reporting law.
“One of the reasons why we are also talking with them [Europe] about these issues is the equivalence issue, right, because the materiality standards we have in the U.S. means that we are going to be in a different place than where they are, as well with the litigation that we have here,” said Quaadman, an executive vice president of the U.S. Chamber. He was referring to the more litigious society in the U.S. The European rule requires double materiality, which the SEC is not pursuing, to the relief of domestic companies.
But upon hearing the word “litigation,” Gensler immediately jumped to the question that many have been curious about, asking whether the U.S. Chamber is suing the SEC, which is expected to finalize the rules in the coming weeks or months.
“No, I am talking about companies being sued,” assured Quaadman. “Don’t worry; we are not gonna serve you with any papers today.” The event was held on Oct. 26, 2023.
Quaadman said that he is worried about differences in regulations. And the SEC sometimes decides to use substituted compliance for those that have multinational operations. For example, the SEC in 2007 decided that foreign private issuers do not have to reconcile IFRS to U.S. GAAP in filing their financial statements with the commission.
“But when we have met with the Europeans, they said, ‘well, you know, yes, conceptually, that’s true. But we are not going to recognize anything that doesn’t have a double materiality standard,’ which you have even said, ‘we’re not going to go there,’” Quaadman said. “So, how do you see the recognition” playing out?
The SEC monitors what happens internationally, but the agency’s rules focus on domestic matters.
“We do … based on U.S. laws, based on how our courts interpret those laws. And we know from time to time you differ and…you seek redress in the courts, and I respect that. That’s part of our democracy,” Gensler said. “We might prefer that you do not, but I respect that.”
Then the SEC chief said the commission is operating under a time-tested 90-year old disclosure regime, which is about giving full, fair disclosures to investors so they can make informed investment decisions.
“It’s not about climate risk. It’s about investors,” he said, pointing to 81 percent of the Russell 1000 companies already disclosed some climate data in 2021. Investors want the information, and the SEC is trying to bring some consistency, usefulness and comparability of the information that many companies already provide.
“Europe, as you say, has a different remit. European Parliament passed the law. It may well be with further reach than what Congress” has authorized the SEC,” Gensler said.
He also said that if the SEC is able to finalize the rule, it would be best if the court sustained it for the agency.
Gensler’s Pitch to Corporate America and U.S. Chamber
“This is just my pitch to Corporate America and the Chamber,” Gensler said. “But no U.S. rule would mean that…—and we are 40 percent of the world’s capital markets—… many of [U.S. companies] would be looking to other jurisdictions and need to comply with those other jurisdictions. A rule sustained in court is then something that they can always point to, and you can have those discussions.”
“You can’t prejudge them, but you could have discussions about whether it’s… equivalence…. But substituted compliance is usually a term that’s used in these international discussions because they have a different law,” he added. “And we are not solving for their law. We are solving for U.S. capital markets, U.S. disclosure regimes. And only the authorities that Congress has given us.”
Gensler’s uneasiness about a potential lawsuit is understandable because the powerful business group has a history of suing regulators, including the SEC, on regulations that companies find too burdensome—many times winning in district courts that have more business-friendly judges. And the U.S. Chamber had already threatened a lawsuit privately.
Moreover, Quaadman, perhaps to no one’s surprise, fired another warning shot to Gensler by making a reference to more stringent disclosure requirements that the state of California signed into law, including scope 3 greenhouse gas (GHG) emissions, which companies say are too challenging to calculate as it covers indirect upstream and downstream emissions from the company’s value chain. Moreover, unlike the SEC, the state requires both public and private companies to make the disclosures.
“If the SEC comes up with the California disclosure, I think it is reasonable to say our lawyers will be meeting in court,” said Quaadman at the beginning of the event.
This article originally appeared in the October 27, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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