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A Review of the Reaction to the SEC's Climate-Related Disclosure Proposal and What Might Come Next

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As we’ve previously discussed, in March 2022 the Securities and Exchange Commission (“SEC”) proposed significant regulations that would require public companies to make a wide range of new climate-related disclosures. The proposed disclosure framework is modeled primarily on the Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations, while the proposed emissions reporting requirements are generally based on the Greenhouse Gas (“GHG”) Protocol’s concept of scopes and related methodology.

The proposed rules would mandate a number of new climate-related disclosures by public companies (domestic and foreign) in registration statements and annual reports filed with the SEC. As proposed, the rules would require a public company to disclose its direct GHG emissions (“Scope 1” emissions) and its indirect GHG emissions from the purchase of electricity and other forms of energy (“Scope 2” emissions), regardless of materiality, as well as indirect upstream and downstream GHG emissions from the company’s value chain (“Scope 3” emissions), but only if Scope 3 emissions are “material.” Also, the proposed rules would require the disclosure of various pieces of information related to a company’s publicly announced climate-related targets, goals, and/or transition plans. Further, the proposed rules would require reporting in the notes to a company’s financial statements whether and how climate-related events and transition activities impact the line items of the company’s financial statements above a 1% threshold  (see our prior publication for additional details).

Since the SEC published its proposal, it received more than 15,000 comments from the public and the proposed rules have been the subject of extensive coverage in the media and Congress. Three significant themes emerged: the SEC’s legal authority to require climate-related disclosures; the role of materiality in what disclosures should be mandated; and the extent to which Scope 3 emissions disclosure should be required. Below we summarize the reaction that followed and what might come next.

 Controversial Proposal Generates a Significant Response

 Shortly after the SEC issued the proposed rules, a group of Republican senators sent a letter to Chair Gensler urging the SEC to withdraw the proposal, arguing it is not within the SEC’s mission, regulatory authority or technical expertise. The letter further asserted that the proposed rules fail to adequately incorporate the concept of materiality, the cornerstone of the disclosure system under the federal securities laws. Additionally, the letter noted the substantial compliance costs that would be imposed on public companies and, through the Scope 3 disclosure requirements, non-public companies that are in the value chain of public companies.

Many trade associations, investors, businesses, organizations, and others also submitted extensive comments to the SEC on the proposed rules, and many of those comments echoed the concerns raised by the Senate Republicans. Some notable comments included the following:

  • One group of former SEC Chairs and Commissioners criticized the proposal’s disregard of financial materiality and they further asserted that the rules would be reversed by a court as exceeding the SEC’s legal authority, which could harm the SEC’s regulatory mission.

  • Another group of former SEC Chairs and Commissioners along with leading scholars and practitioners wrote in support of their view that the SEC has clear statutory authority to require climate-related disclosures for publicly traded companies. They disagreed with an argument that the SEC could not require disclosure related to a politically charged topic that affected major policy issues.

  • The Society for Corporate Governance alleged that the proposed rules exceed the SEC’s authority and depart from governing law and the SEC’s investor protection objective by departing widely from the longstanding legal concept of materiality, and they further argued the proposal grossly underestimates the extraordinary costs of complying with the rules.

  • A group, including former Delaware Chief Justice and Chancellor Leo Strine and former Director of the SEC’s Division of Corporation Finance Alan Beller, generally supported the proposal and the SEC’s authority to promulgate it, but they recommended making Scope 3 disclosures voluntary and subjecting the narrative and quantitative disclosures beyond Scope 1 and 2 emissions to a materiality standard consistent with the SEC’s Management’s Discussion and Analysis reporting requirements.

  • The Council of Institutional Investors generally supported the basic disclosure requirements, including requirements on climate-related risks, Scope 1 and Scope 2 emissions, and, with certain accommodations for companies, Scope 3 emissions, but it recommended extending certain of the proposed initial compliance dates.

  • While BlackRock said it supports a robust framework of climate related disclosures, it pushed back on certain parts of the proposal, calling for more flexibility in applying the rules and modifying the rules to provide investors with high-quality climate-related disclosures, such as by limiting reporting obligations to well-established concepts of materiality. It also called for eliminating the financial statements disclosure requirements because, in part, the planned 1% threshold rule “would result in highly inaccurate disclosures and unduly burdensome compliance costs.”

  • The California State Teachers’ Retirements System called for requiring Scope 3 emissions reporting for all public companies, without regard to materiality, and attestation of GHG emissions for non-accelerated filers and smaller reporting companies in addition to large accelerated filers and accelerated filers.

  • The U.S. Chamber of Commerce noted that the proposal would require companies to provide extensive amounts of immaterial information. With respect to specific proposals, the Chamber also argued that Scope 3 emissions reporting should be voluntary, there should not be an attestation requirement for Scope 1 and 2 emissions disclosure, and the final rules should not create new financial statement disclosure requirements.

  • A group of Senate Democrats wrote urging the SEC to preserve the Scope 3 emissions disclosure requirement and suggested the SEC adopt a quantitative threshold for mandatory disclosure of Scope 3 emissions instead of the materiality standard. The group also argued for mandating disclosure of climate-related lobbying activities, such as the percentage (by time or dollars spent) of lobbying devoted to both pro- and anti-climate legislation and regulations.

What Comes Next?

In January 2023, the SEC released an agenda indicating April 2023 as the target for the final climate-related disclosure rules. However, April passed and in June 2023 a revised SEC agenda suggested October 2023 as the best new estimate for when the SEC will issue final rules. 

Based on the numerous and significant comments and meaningful push back from congressional Republicans, trade associations and individual businesses, analysts expect the SEC to change aspects of the proposed rules that are viewed as too burdensome.

There have been murmurs that the finalized disclosure framework will modify the financial statement portion of the proposed rules, which as proposed would require reporting climate costs exceeding 1% of financial statement line items. The Wall Street Journal reported that the SEC “is weighing making the requirements less onerous than originally proposed . . . such as by raising the threshold at which companies must report climate costs.”

Reports have also suggested that support for Scope 3 emissions disclosure has weakened, including among some congressional Democrats, due to the potential impact on small businesses should public companies demand they provide Scope 3 emissions data. However, Democrats are certainly not unified on the issue. In a March 2023 letter, more than fifty congressional Democrats wrote to Chair Gensler expressing concern about media reports that the SEC would be curtailing Scope 3 emissions reporting in the final rules.

For his part, Chair Gensler, when asked about Scope 3 emissions disclosure at the March 2023 conference of the Council of Institutional Investors said “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. . . . 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.””

More recently, in July 2023, Chair Gensler remarked that the SEC is “considering carefully the more than 15,000 comments we’ve received on the proposal. We greatly benefit from public input and, given the economics and the law, will consider adjustments to the proposed rule that the staff, and ultimately the [SEC], think are appropriate in light of those comments.”

General support from Democrats remains meaningful. In an August 2023 letter, eighty House Democrats wrote to Chair Gensler urging him to finalize strong climate-related disclosure rules as quickly as possible.  For now, October 2023 remains the target for final rules.

Regardless, litigation is almost certain to follow whenever the final rules are issued. Republican members of Congress and commentators in media outlets have suggested that the final rules, if not sufficiently scaled back from the proposal, will be challenged under the Supreme Court’s holding in West Virginia v. EPA, under an argument that the rules would be an overreach of the SEC’s regulatory authority without clear congressional authorization. SEC Commissioner Mark Uyeda has also expressed concern that the final rules might result in the SEC exceeding its constitutional authority, referencing West Virginia v. EPA.

Climate Change Disclosure Remains a Focus in the U.S. and Abroad

While the market waits for the SEC’s final rules, regulators in the U.S. and abroad are keeping climate-related disclosure front and center. In response to actions by other regulators (and sustainability focused investors), some companies are proceeding as though the SEC’s proposed rules or a similar framework are already in effect. This probably makes sense given some recent developments. For example, on July 31, 2023, the European Commission adopted the first set of European Sustainability Reporting Standards in relation to the EU Corporate Sustainability Reporting Directive, which will require detailed sustainability reporting starting January 1, 2024. The EU requirements will apply to a large number of EU and non-EU companies. Further, several other jurisdictions such as Canada, and some U.S. states, have adopted or proposed climate-related disclosure rules. On September 12 and 13, 2023, the California State Legislature passed two bills aimed at mandating climate-related disclosures from large business entities doing business in California. The two bills are SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Greenhouse Gases: Climate-related Financial Risk). SB 253 requires U.S.-based businesses with total annual revenues over one billion dollars and doing business in California to report their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions. SB 261 requires U.S.-based businesses with total annual revenues over five hundred million dollars and doing business in California to prepare climate-related risk disclosures aligned with the TCFD reporting framework or another equivalent framework. On September 17, California Governor Gavin Newson announced that he intends to sign the bills into law. Otherwise, the bills will automatically become law unless Governor Newson vetoes the bills by October 14, 2023. 

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