By Mark S. Nelson, J.D.
Fifty-one Congressional Democrats constitute the latest group of lawmakers to press their views with the SEC on climate risk disclosures for public companies. Democrats this week urged the SEC not to weaken the final version of the agency’s forthcoming climate risk disclosure regulation, while GOP lawmakers last month urged the SEC to heed warnings about the agency’s “partisan” agenda and regulatory overreach while cautioning of legal challenges to come if the agency adopts a final rule that approximates the version of the regulation proposed almost a year ago.
Scope 3 third rail. As of the date of publication of this story, the SEC had received 16,086 public comments consisting of individually-identifiable comment letters (4,472) and generic form letters (11,614); SEC commissioners and other agency officials have held 240 meetings with various individuals and interest groups. For purposes of perspective, those numbers pale in comparison with the millions of public comments submitted regarding a 2011 petition for rulemaking that asked the SEC to require public companies to disclose their political spending habits, a topic Congress has in recent years repeatedly barred the SEC from addressing by prohibiting annual appropriations for such rulemaking.
By way of further background, a number of possible topics may be under consideration by the SEC as it finalizes the climate risk disclosure rule, some of which are suggested by the proposal itself, while others have been raised by public comments. Examples of areas the final rule may address include the degree to which climate disclosure will be made in notes to financial statements versus the management’s discussion and analysis, whether disclosures will be filed or furnished, the costs of preparing disclosures, uncertainties about some types of disclosure (e.g., scenario analyses) that may require additional work to render data useful to investors, and which standards will predominate in an American climate disclosure rule.
On this latter topic, the SEC’s proposal leans heavily on standards published by the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol, but European standards driven by the International Sustainability Standards Board will likely have a global impact on public company climate disclosures (within the past year, SASB was incorporated into IFRS Foundation, which created the ISSB).
Democrat lawmakers’ recent letter to the SEC specifically addressed another topic the SEC may be mulling as it finalizes the climate risk disclosure regulation—Scope 3 emissions, or what might be considered the proverbial electrified third rail of climate disclosure. The Democrats’ letter said overall that they want the SEC to move forward with a “strong climate disclosure rule without delay.” While the letter worried about the SEC potentially raising the threshold for disclosure (the proposal pegged the threshold at 1 percent of the specified line-item financial metric), the letter was even more concerned about the prospect that the SEC could weaken or even eliminate Scope 3 emissions disclosures from the final regulation.
Democrats cited an S&P global report for the statistic that 90 percent of oil & gas company emissions fall into the category of Scope 3 emissions. “Not requiring Scope 3 emissions disclosures would enable these and other companies with similar types of emissions patterns to hide the vast majority of their exposure to climate risk from regulators and investors,” said the Democrats’ letter. “For many companies and sectors, a greenhouse gas inventory that omits Scope 3 would be materially misleading to investors” (a footnote to the quoted passage cited an As You Sow press release and a comment letter submitted to the SEC by a group of 75 investors).
With respect to what investors want regarding Scope 3, Democrats said the vast majority of institutional investors’ comments on the SEC’s proposal urged the SEC to keep Scope 3 emissions disclosures in the final regulation. Democrats also noted that Scope 3 emissions disclosures will likely become “inevitable” because of forthcoming European rules and investor demand (the letter noted that ISSB’s global baseline standard includes Scope 3 emissions).
As for potential legal challenges to a final SEC climate risk disclosure regulation, Democrats urged the SEC to not be intimidated by the Supreme Court’s opinion in West Virginia v. EPA, in which a conservative majority invoked the major questions doctrine to strike down an EPA climate regulation. That case can be read both narrowly or broadly, with potentially far-reaching consequences under the broader view of the court’s holding. The letter from Democrat lawmakers said the SEC has authority to require standardized public company disclosures, including on climate risk. The letter cited multiple authorities for the proposition that the SEC’s climate risk “…rulemaking is well within the Commission’s authorities and long-standing practice of requiring standardized disclosures of investor-led, decision-useful information, and thus should not be reasonably at-risk under the Major Questions Doctrine.”
Major questions doctrine. Republican lawmakers also have recently offered their views to the SEC ahead of the adoption of its final climate risk disclosure regulation. Last month, House Financial Services Committee Chair Patrick McHenry (R-NC), joined by Rep. Bill Huizenga (R-Mich), who chairs the House FSC's Subcommittee on Oversight and Investigations, and Sen. Tim Scott (R-SC), Ranking Member of the Senate Banking Committee, emphasized their belief that the proposed climate risk disclosure regulation exceeds the SEC’s statutory authorities.
The trio warned that, under West Virginia v. EPA, the SEC may lack Congressional authority to issue a final regulation mandating that public companies make disclosures about their climate risks. “Congress did not intend for the SEC to be an arbiter of business strategies, much less the determining body for climate policies,” said the Republicans’ letter. “This abuse of the rulemaking process, and blatant partisan efforts to circumvent the legislative process, are outside the bounds of the SEC’s mission and authority.”
The letter also criticized current SEC Chair Gary Gensler for, in the drafters’ view, deviating in recent rulemakings from a more principles-based approach to public company disclosures to a more prescriptive approach. In the climate context, the letter cited a Politico report for the notion that the SEC may be considering rolling back some parts of the climate risk disclosure regulation in light of the possibility of future legal challenges to the final version of the regulation.
Moreover, the Republican lawmakers demanded that the SEC respond to a wide-ranging information request, including for data on the impact the climate risk regulation may have on energy prices, how the SEC plans to address First Amendment issues regarding compelled speech, whether the SEC coordinated with other federal regulators or non-governmental organizations or with the White House Climate Policy Office, the legal advice received or considered by the SEC’s Office of the Chair and its Office of General Counsel regarding the SEC’s authority to issue the climate risk disclosure regulation, the names of SEC officials and employees working on the climate risk regulation, and whether SEC officials or employees used non-government devices when working on the climate risk regulation.