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US Securities and Exchange Commission

SEC Delays Climate Change Disclosure Rulemaking

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

It’s official: the Securities and Exchange Commission has delayed its climate change disclosure rulemaking once again. And now the agency will consider finalizing its March 2022 proposal in the fall this year, according to an updated rulemaking agenda, which was made public on June 13, 2023.

The climate change disclosure rule is probably the most closely watched and one of the most consequential projects that the SEC will undertake during Chair Gary Gensler’s tenure in part because it will test the boundaries of the securities laws and the commission’s authority.

If adopted, it will represent a significant change for public companies. Many large companies today already provide voluntary sustainability reports. But the proposal, in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, has extensive standardized and prescriptive requirements: disclosures inside and outside the financial statements; greenhouse gas emissions disclosures; attestation of disclosures, among others.

Many observers early in the year thought the SEC will be moving ahead with a final set of rules in the spring, as the commission’s previous agenda indicated in January. But over time, it became clear that there will be a delay.

Even though the SEC is planning to finalize climate rules around October as reflected in the most current agenda, that is just a best estimate. It can happen before or after October. But it is likely that the vote will not happen in the summer, given the tremendous amount of lobbying either for or against. About 15,000 comment letters have been submitted, with 5,000 of them unique letters.

More importantly, the SEC will need to change some aspects of the proposal that may be too difficult and burdensome to comply, such as the 1 percent materiality threshold for financial disclosure and Scope 3 for upstream and downstream greenhouse gas emission data.

This rulemaking has been especially controversial as many critics—mainly business organizations, conservatives, and even SEC Commissioner Hester Peirce—questioned whether the agency even 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, said “we are not the Securities and Environment Commission—at least not yet.” The U.S. Chamber of Commerce—while not officially saying it will sue the SEC when the rules are finalized—has been threatening lawsuit privately.

In response, Gensler has been defending the SEC’s authority at various public events.

In addition, the Supreme Court’s ruling in June 2022 on West Virginia v. EPA threw cold water on the SEC’s rule. “We know that’s significant and meaningful, and we look at it within those rulings as well,” Gensler said at a conference in October last year. “It is the Supreme Court.”

Delays from the Get-go

When Joe Biden became president in January 2021, there was a change in regulatory policy, and tackling the impact of climate change has become one of the most important priorities for the administration. Gensler, who became SEC chair in April 2021, at first wanted to issue a proposal by the end of 2021. It got delayed until March 2022.

And proposed Release No. 33-11042 discussded an effective date of December 2022 as an example. December obviously came and went. And now instead of this past spring, it will be in the fall of 2023, though there is always a chance that this timeframe may be pushed back.

“With the April 2023 target having come and gone, the delay was not a surprise,” said Elizabeth Morgan, a partner with King & Spalding LLP in New York. “But an open question is whether the agency is far enough along that the October timing is realistic, or will the complexities and ongoing public engagement drive the prospects of a final rule even further into the future?”

Further, Gensler is continuing to have an ambitious agenda with 55 rules to be proposed and finalized in the short-term agenda, which has likely been putting a lot of pressure on the staff who need to draft recommended rule changes.

But he believes timely regulatory changes are necessary to keep pace with the ever changing business environment.

“In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour,” Gensler said in a statement about the most recent rulemaking agenda. “Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”

‘Radical Agenda’

However, some comment letters that have been submitted well past the Nov. 1, 2022, deadline are predictably not supporting it.

For example, business groups and Republican lawmakers have been deeply unhappy with Gensler’s aggressive pace of rulemaking that they see will impose costs without generating commensurate benefits. And senior Republican members of the House Financial Services Committee, Representatives Ann Wagner of Missouri and Bill Huizenga of Michigan, wrote a letter to SEC General Counsel Megan Barbero to reiterate their concern about the legal authority for “the radical regulatory agenda” that the SEC has been pursuing under Chair Gensler. The chair of a regulatory agency largely sets the rulemaking agenda.

“As you know, the Commission—like any administrative agency—’has no power to act . . . unless and until Congress authorizes it to do so by statute,’” the lawmakers wrote on April 17. “In the SEC’s case, the Securities Act and the Exchange Act (together, the “Acts”) limit the Commission’s authority to matters that further specific principles or directives set out in those Acts. As a result, the SEC cannot require disclosures or advance rulemakings on any topic it deems important. Instead, unless otherwise expressly authorized by Congress, the SEC may only act in areas that are necessary or appropriate to further those Acts.”

They cited the Supreme Court’s EPA ruling.

“The Commission’s radical agenda plainly implicates the issues raised in West Virginia v. EPA. Over the next few months, the Commission is set to finalize massively expensive and complex changes to its regulatory regime that would redraw the structure of the U.S. equity markets, insert itself into the debate over climate change, micromanage companies’ cybersecurity programs, and put onerous burdens on stock buyback programs,” they wrote. “These and other proposals would cost billions of dollars. By the Commission’s own estimates, for instance, the climate rule alone would cost companies two-and-a-half times more than all SEC disclosures they currently make.”

In the latest update, the SEC plans to finalize some of the rules the lawmakers cite in the Spring of 2024.

Other closely watched rulemakings either in the proposal or final stage have also been delayed.

“I see that many of the significant rulemakings that issuers are watching have been pushed back – human capital management, climate change disclosure and cyber security have all been pushed back to the fall,” said Dave Brown, a partner with Alston & Bird LLP in Washington. “Hopefully the SEC is taking the issuer comments seriously and significantly reworking these proposals.”



This article originally appeared in the June 15, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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