By Anne Sherry, J.D.
In supplemental comments on the SEC’s proposed climate-related disclosures, the U.S. Chamber of Commerce reiterated and expanded upon its earlier objections that the rule would greatly burden companies and auditors. The Chamber observes that even the institutional investors that would purportedly benefit from the rules oppose them as proposed. And the Supreme Court’s recent reliance on the major questions doctrine for statutory interpretation suggests that the SEC may lack the authority to issue rules that, according to the Chamber, “reorder the market.” According to the group, the proposal’s flaws result from the SEC moving too quickly on a huge volume of rules, depriving an already shorthanded staff of the time needed to develop properly tailored proposals.
Climate proposal. The proposed amendments to Regulations S-K and S-X would, if adopted, require public companies to formally incorporate climate risk disclosures in their annual and periodic reports. Under the proposed regulation, companies would have to provide information about Scope 1 and Scope 2 emissions and provide a related attestation report from an independent service provider if the company is an accelerated or large accelerated filer.
The proposal also would include Scope 3 disclosures to the extent they are material or if a company has such an emissions target. Smaller reporting companies would be exempt from this requirement, and the Scope 3 provisions would afford companies a longer phase-in time, provide for a safe harbor, and not require attestation.
Chamber concerns. In its supplemental comment letter, the Chamber said that the proposed rules fail to strike the right balance of informing and protecting investors without imposing too great a cost on disclosing entities or the economy as a whole. The group raises three main issues with the amendments.
First, the Chamber writes that participants throughout the financial industry believe that significant aspects of the proposal would be costly and unworkable. Even the large institutional investors cited throughout the proposal believe the SEC has gone too far in requiring detailed, prescriptive disclosures that do not reflect the emerging state of climate data. For example, proposed Article 14 of Reg S-X would require companies to calculate the impacts of climate risks on every line item on their financial statements and disclose any impacts that aggregated to 1 percent or more of a line item. Multiple large investors said this line-by-line reporting requirement would impose an enormous operational burden on companies without producing meaningful or comparable data to inform investment decisions. Similarly, given the emerging development of Scope 3 methodologies, the Scope 3 disclosure requirement would impose enormous costs with little benefit to investors.
Second, the letter asserts that the SEC’s cost-benefit analysis is significantly flawed. The Commission estimated initial compliance costs of $640,000 and annual ongoing costs of $530,000, but one large reporting company said its implementation costs would exceed $100 million and it would spend $10 to $25 million per year thereafter. In another example, the SEC estimated annual internal costs of $150,000, which would likely not cover the salary and benefits for even one new full-time employee. The SEC also failed to consider some costs, like the “multi-billion-dollar” impact on the broader economy and the opportunity costs of reallocating budgets and priorities. On the benefits side, the Chamber argues that the evidence shows many investors do not find disclosures on greenhouse gas emissions to be material.
Finally, the Chamber cited the Supreme Court’s decision in West Virginia v. EPA, significantly the Court’s emphasis on the major questions doctrine, a canon of statutory interpretation that instructs that Congress does delegate consequential powers to agencies unless that delegation is clear. The SEC may have “some latitude” in requiring that material information be disclosed, but it does not have the delegated authority to “reorder the market,” the Chamber writes. Congress also did not delegate to the Commission the authority to regulate emissions that contribute to climate change. Furthermore, the letter states that the proposed rules violate the First Amendment by compelling speech on issues that are controversial and subject to reasonable debate.