Proposed SEC Climate Regulations Face Pushback

By Gabriela Carson and Alexandra Xochil, February 26, 2024

While the push for Environmental, Social, and Corporate Governance (ESG) investing continues, the Securities and Exchange Commission (SEC) faces challenges to its proposed climate-risk disclosure rule.

Investors who utilize the market to create positive societal change invest in companies with high performance or commitments in the ESG interest areas. The climate crisis is a major concern in ESG investing, and corporate greenhouse gas (GHG) emissions reform has come to the forefront of public opinion. As more investors put their money into climate-conscious companies, companies that do not have demonstrated ESG commitments are forced to pay heed to the trend and reflect on their own practices. In the past few years, the SEC has had to consider investors’ concerns about the ethical aspects of their investments. As a securities regulator, the SEC concerns itself with the materiality of risks for investors of public companies, efficient markets, and capital formation. However, the costs of assessing and reporting GHG emissions, along with the reach of the SEC’s power, have come under question by industry titans like the Chamber of Commerce. Climate disclosure rules are imperative to meaningful progress in the business sector, and those who oppose them stand in the way of climate action.

In 2022, the SEC introduced a climate-risk proposal that details new requirements for public companies’ disclosure reporting. Under the proposed rule, public companies will be required to disclose two types of climate-related risks: physical and transition risks. Physical risks are divided into acute risks (e.g., risks resulting from shorter-term extreme weather events) and chronic risks (e.g., risks resulting from longer-term, sustained climate changes), while transition risks arise from the shift away from fossil fuels. Carbon-intensive assets, like oil wells, will have greater financial risks during the transition to greener production methods because they could lose value as a result of policy changes restricting their use. In addition to risks, companies will be required to provide information on their Scope 1, 2, and 3 GHG emissions under the initial proposal.

Source: SEC

It is no surprise that the Chamber and its members have concerns about the proposed rule. When it first announced that there would be a climate-related disclosure rule, the SEC mentioned its intention to encompass Scope 1, 2, and 3 emissions in its reporting guidelines. The initial inclusion of Scope 3 emissions was perhaps the greatest point of contention, and after its announcement, the SEC received tens of thousands of comments, many of which concerned Scope 3. It is the most difficult scope to measure for both the companies under regulation and the regulators themselves. This is because it is largely out of the control of the individual companies, and would require much wider-reaching data collection. Recently, the SEC dropped Scope 3 requirements from the proposal, which drastically reduces the breadth of the disclosure requirements.

There are also some discrepancies between the assessment and reporting costs estimated by the SEC and the Chamber (the latter is higher). In October of 2023, SEC Chair Gary Gensler sat down with Executive Vice President of the Chamber of Commerce’s Center for Capital Markets Competitiveness Tom Quaadman to have a fireside chat about the proposal. Quaadman posed the question of whether it is possible to achieve material disclosure without a large increase in costs for the companies. In response, Chairman Gensler pointed out that the substantial amount of existing voluntary reporting would subtract from any cost estimations.

Also in the fireside chat, Chairman Gensler repeated the importance of uniformity in rulings and reporting. The proposed rule would ensure all public companies that fall under SEC authority would be following the same reporting requirements, which would be good for the markets as it would eliminate irregularities and make reporting more comparable and consistent.

There have simultaneously been different emissions disclosure efforts in California and the EU that have potential overlap with the impending SEC rule. An estimated 1400-1500 companies come under the newly-passed California law. Chamber Executive VP Quaadman expressed disagreement with the reach of the California law as well, and in January 2024, the Chamber, alongside other trade associations, sued the state over it. The European Union has introduced the Corporate Sustainability Reporting Directive (CSRD) in order to bring sustainability reporting in line with financial reporting. CSRD will be implemented in a phased approach, and will require EU companies to report on how issues like climate change affects their businesses, and how their businesses affect people and the planet. Chair Gensler mentioned that American public capital markets make up about 40-45% of global public capital markets, meaning some American companies fall under CSRD, which is not fully into effect yet.

Congress is divided over the SEC’s plans as well. Republicans largely believe that the agency is overstepping its authority, and that the Supreme Court will strike it down. On January 18th, 2024, the Financial Services Committee, chaired by Patrick McHenry (R-NC), held a hearing entitled Oversight of the SEC’s Proposed Climate Disclosure Rule: A Future of Legal Hurdles. (One of the witnesses included was Mr. Charles Crain, VP of Domestic Policy for the National Association of Manufacturers.) While pro-climate legislation is generally favored by Democrats, Senators Sinema (AZ) and Tester (MT) have expressed concerns about the burden the proposed rule would have on small farmers.

Industry pushback and stakeholder comments have both contributed to delays in the timeline for climate-related disclosure guidelines. However, the sheer magnitude of the task itself introduces some uncertainty as to when the guidelines will actually be enforceable. Not only does the SEC have to consider a somewhat novel kind of materiality–double materiality, which involves an impact that is material in both a financial and environmental or social sense–but it has to consider the capabilities of the regulated companies in regard to assessing and reporting emissions data. Depending on the costs incurred by affected companies, it could be a significant amount of time before it is even possible for this scale of ESG reporting to take effect. 

Despite the many challenges facing the SEC’s proposed rule, it is a prime example of how ESG investing can have an impact on how companies operate. As of now, the proposed rule is expected to be finalized as early as March 2024, but this will not come without more challenges and pushback from various stakeholders. The SEC’s proposal for climate-risk and GHG emission reporting requirements reflects the growing number of concerned investors who prioritize climate action, and they must persist in the face of opposition to ensure companies do their part in protecting the planet.

Change The Chamber is a bipartisan coalition of over 100 student groups, including undergraduates, graduate students and recent graduates.