The SEC is planning to finalize the closely-watched climate change disclosure rule in the next few months, and this was the number one topic that members of the Council of Institutional Investors (CII) asked Chair Gary Gensler about during the organization’s 2023 Spring Conference on March 6 in Washington.
Gensler, who has been careful not to discuss the details of the pending rulemaking because of intense lobbying from proponents and opponents alike, still provided some responses, though measured.
Investors largely support the proposal, and liberal Democratic lawmakers also support the rule. For example, about 50 senators and representatives, including Elizabeth Warren and Jamie Raskin, wrote a joint letter on March 5, pressing Gensler to quickly finalize the rule without watering down the requirements.
But facing disclosure burdens—as well as potential public criticism of the disclosures that may shine a negative light on their operations—businesses have largely expressed concerns. Unless the SEC cuts back on many of the more controversial requirements, the commission is likely to face lawsuit from business associations, especially the U.S. Chamber of Commerce. And this was one of the questions asked during the CII conference: how does the SEC factor in potential lawsuit in its rulemaking?
SEC’s Response to Potential Lawsuit
“It’s really straight forward,” responded Gensler, who zoomed into the conference. “The best thing is to stay within the law…. I know that your audience is going ‘yeah, that sounds straightforward.’ But we’ve got the securities laws and staying within those authorities, and how the courts have interpreted those authorities.”
Moreover, he said the SEC is complying with the Administrative Procedures Act, including notice-and-comment on a proposal.
The commission also factor in economic analysis, capital formation, efficiency and competition in its rulemaking, he said.
While he did not discuss the Supreme Court’s decision last year in West Virginia v. EPA at this conference, he previously said that the high court’s ruling is “significant and meaningful” for the SEC.
Some legal scholars argue that the high court decision may have little impact on the SEC’s rulemaking, but others believe that—given the current conservative makeup—the Supreme Court might well rule against the securities regulator as government overreach. (See Supreme Court’s EPA Ruling is Significant to SEC Climate Disclosure Rulemaking, Chair Gensler Says in the Oct. 17, 2022, edition of Accounting & Compliance Alert.)
Further, even before the EPA ruling, many critics, including conservative SEC Commissioner Hester Peirce—questioned whether the agency 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.”
At the CII conference, Gensler rejected the claim that the SEC has become a merit regulator, emphasizing that investors today are making decisions based on climate risk disclosures that many companies are already providing voluntarily.
“So, though we are merit neutral, and there are people around these debates that want to push one agenda or another, our only remit is about full, fair and truthful disclosure, trying to bring some consistency to the disclosures that are already in the mix,” Gensler said.
“Congress decided that many, many decades ago, we are merit neutral whether somebody wants to go longer risk or shorter risk,” he added. “In this case, if whether they want to go long green or short green. We are merit neutral; it’s just about bringing consistency and comparability to the material information that investors consider when they are making investment decisions.”
Greenhouse gas emissions Scope 1, 2 and 3
One of the most contentious issues of the SEC’s proposal has been disclosure of greenhouse gas (GHG) emissions data, especially the inclusion of Scope 3. And Gensler was asked whether the SEC might drop Scope 3 from the final rule.
“I don’t want to get ahead of the process, but … there are far more companies that are already disclosing Scope 1 and 2; far more investors are looking at that, making investment decisions. But Scope 3 emissions are disclosed by some issuers. Many investors are looking at this information as well,” Gensler said. “It’s not as well developed. That’s why in our proposal, we took a tiered approach, a different approach to Scope 1 and 2 than we did to Scope 3.”
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. But companies say that there is no reliable way to measure the emissions, and even making inaccurate disclosures would be costly.
International Standard-Setting vs. SEC Rulemaking
Another question was related to the International Sustainability Standards Board’s (ISSB) work on sustainability disclosure, and how the SEC’s rule will align or differ from international standards. The ISSB issued a proposal last year and is also aiming to finalize its standards in the next few months.
“You earlier asked about the law and the courts and everything,” Gensler said. “We live within our legal authorities within our capital markets and will consider whatever potential final rules within that.”
The ISSB’s rule is a set of suggested standards for almost 200 different jurisdictions around the world. Each country would need to decide how or whether to adopt those recommended standards.
Gensler pointed out that both the ISSB and the SEC built upon an international framework established by the recommendations made by the Task Force on Climate-Related Financial Disclosures (TCFD), which was set up by the Financial Stability Board.
The framework has both qualitative and quantitative disclosures. The qualitative disclosures are about risk management and strategy governance. Companies would also need to disclose transition plans.
“And we happened coincidentally to propose our rule about the same time that ISSB proposed theirs,” Gensler said. “So, the public sort of engaged in both processes in a similar timeframe, with many similar comments. Investors significantly supportive. Issuers, of course, the public comment files you can look at, raising some issues about the challenges they might face in those disclosures. And while we appreciate and look at what ISSB is doing, really we have to stick to our comment file and the comments we received.”
SEC’s Ambitious Rulemaking Agenda
The SEC currently plans to finalize 24 rules this year, and Gensler was asked whether the rulemaking pace has been too fast that market participants have not had the time to properly provide feedback.
Gensler responded that the SEC has been getting “significant” feedback and benefit from it.
But he pointed to the many rules that the SEC adopted, especially during the last couple of years when Jay Clayton was chairman.
“We went back and looked a little bit at my immediate predecessor, I think moved 64 final rules during his four years,” he said.
This article originally appeared in the March 8, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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