SEC climate rule leaves a lot up to companies

One thing that opponents and supporters of the SEC climate rule have agreed on is that there was compromise in the final version passed Wednesday. But for those against it, there clearly wasn’t enough. And champions of the rule were left with something that they say is barely a step forward, nowhere near sufficient to address the major issues presented by climate change that affect public companies’ finances.

Further, the requirements don’t mesh with more stringent reporting regimes, such as in the European Union and a forthcoming requirement in California, complicating things for companies with business there.

“It’s a baby step, and there’s a lot of work that needs to be done,” said former SEC commissioner Allison Herren Lee, who supported the proposed version of the rule before leaving the agency.

“It remains to be seen whether this rule is better than nothing, but nothing is a very low bar,” Lee said during a press conference following the vote.

It's also all but guaranteed that there will be a legal challenge to the rule, even though many of the cuts the regulator made to its proposal appear to have been made to help it withstand litigation, lawyers said.

The Securities and Exchange Commission passed the final version of its rule on a party-line vote, with commissioners Hester Peirce and Mark Uyeda dissenting and commissioners Caroline Crenshaw and Jaime Lizárraga and chair Gary Gensler consenting.

Unlike the proposed version of the rule, which won favor among environmental groups and sustainable investors but displeased conservatives, the final one did not include a requirement for large public companies to report Scope 3 emissions, which account for the majority of greenhouse gases. It also severely walked back disclosure for Scope 1 and 2 emissions, which pertain to the carbon that companies emit directly or that is associate with the energy they use. For those categories, companies will be able to determine for themselves whether such emissions are materially significant and therefore includable on their public issuances and annual reports.

On Wednesday, Republicans in Congress prepared responses indicating that they will be fighting the SEC climate rule.

“The SEC is not a climate regulator,” House Financial Services Committee Chair Patrick McHenry said in a statement. “No matter how badly Chair Gensler wants to inflate his job description, that fact is undeniable. Republicans have consistently warned Biden’s regulators to stick to their knitting for the good of our financial system.”

In an analysis published after the rule was passed, Jaret Seiberg, financial services and housing policy analyst for TD Cowen Washington Research Group, said the firm is “increasingly dubious this rule will survive congressional and judicial review despite efforts by the SEC to narrow the proposal by dropping Scope 3 disclosures and only mandating disclosures if they are material.”

But the SEC commissioners and staff almost certainly expected a lawsuit.

“The SEC definitely tried to reduce its litigation risk by narrowing the scope of the proposal,” said Charles Riely, a partner at law firm Jenner & Block who is a former supervisor in the SEC’s enforcement division. Still, the rule represents a major change in the disclosure requirements for public companies, making a lawsuit inevitable, he said. Given that the Supreme Court may soon walk back portions of what is known as the Chevron deference, that will make “a fascinating legal battle,” Riely said. A forthcoming decision by the high court could seriously limit the ability of federal agencies to make and amend rules and regulations.

Should that happen, the SEC would likely choose to enforce violations that have to do with the core of a business’ operation, such as if a company specializing in environmental, social or governance issues engaged in fraud around those issues, said Jennifer Lee, also a partner at Jenner and previously an assistant director in the regulator’s enforcement division.

“The SEC wants to meet investors where they are, and they perceive climate risk to be a major issue for investors,” Lee said.

Former commissioner Herren Lee was clearly disappointed that the rule had been walked back from the toothier proposal. Notably, Scope 3 emissions represent about three-quarters of greenhouse gases globally, meaning that most of the most important data for investors concerned about climate-related risks may not be reported by companies, she said.

But more worrisome is that companies will essentially decide for themselves whether their climate-risk data are material and thus whether to report it at all, she said. That could have two big consequences: Companies will be incented to avoid reporting data; and those that already report such data on a voluntary basis might decide to stop, as they could say it would be inappropriate under the new rule, she said.

“The agency actually risks reversing progress on the issue it purports to address,” Herren Lee said.

That the final rule does not appear to take other climate or emissions disclosure regimes into account will be problematic, she noted.

“On the international front, companies are going to be faced with a morass of different and potentially conflicting decisions to make,” she said. “Global harmonization here is one of the most important issues.”

Last year, California passed two laws that will require big companies in the state, both public and private, to report greenhouse gas emissions eventually. The state is interested in regulating climate issues, and unlike the SEC, it is not focused on investor protection, Herren Lee said.

Having to contend with multijurisdictional reporting requirements is an issue for companies, said Christina Herman, senior director of climate change and environmental justice at the Interfaith Center on Corporate Responsibility

“Reducing the reporting burden is hugely important to companies,” Herman said. “It’s expensive.”

Although the final rule leaves much to be desired, the fact that it establishes guidelines for reporting Scope 1 and 2 greenhouse gas emissions is a step forward, supporters said. Third-party verification of such data, which the SEC calls "attestation," will be phased in through 2033.

“Smart companies have recognized climate change as a material risk and already are taking steps to address it," Green Century Funds president Leslie Samuelrich said in a statement. "As we say, what gets measured gets managed, and isn’t every investor looking for a well-managed company?”

Damon Silvers, senior advisor to the American Federation of Teachers, whose members account for an estimated $2 trillion to $3 trillion in pension assets, said that climate disclosure is highly important to institutional investors.

“Climate change and every aspect of it is going to be dominant factor shaping risk and return in the world’s economy for years to come,” he said. “Fiduciaries need to have comprehensive, comparable data for the firms they invest in.”

A major consequence Silvers said he sees is that big investors could sell their holdings in companies that don’t provide the data they want. “The alternative to having this data in the short term or long term is divestment.”