Today, Reuters reported exclusively that the SEC is indeed planning to eliminate some of the more controversial requirements in its climate disclosure proposal. Of course, we're talking Scope 3. (See this PubCo post, this PubCo post and this PubCo post.). To be sure, this news doesn't come as a complete surprise. Even a year ago, the SEC floated the idea that, in response to concerns regarding potential litigation (among other things), it may well pare down and loosen up some of its proposed rules on climate disclosure. In this article in Politico and this article in the WSJ, "three people familiar with the matter" and "people close to the agency" told reporters that SEC Chair Gary Gensler was "considering scaling back a potentially groundbreaking climate-risk disclosure rule that has drawn intense opposition from corporate America." But at that point, according to Politico, SEC officials stressed that "no decision has yet been made." (See this PubCo post.) Reuters is now reporting that, according to "people familiar with the matter"—are they the same people, I wonder?—among the requirements the SEC plans to scrap in the final rules is the requirement to disclose Scope 3 GHG emissions.
You'll recall that one of the most controversial parts of the SEC's climate disclosure proposal draws on the Greenhouse Gas Protocol, requiring disclosure of a company's Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company's emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. There haven't been that many complaints about the Scope 1 and Scope 2 requirements, but Scope 3 is another matter. According to the SEC, some commenters indicated that, for many companies, Scope 3 emissions represent a large proportion of overall GHG emissions, and therefore, could be material. However, those emissions result from the activities of third parties in the company's "value chain," making collection of the data much more difficult and much less reliable. (See this PubCo post.)
SideBar
In a conversation with the Chamber of Commerce in October last year, Gensler said that comments from investors were largely in favor of disclosure of Scopes 1 and 2 and somewhat split on Scope 3. On the issuer side, while some issuers were very supportive, most expressed a number of concerns. On Scopes 1 and 2, some indicated concerns with timing, filing versus furnishing and attestation, but most concerns were about Scope 3. The SEC had anticipated that response, and that's why the proposal took a tiered approach. The agricultural community also had concerns about being pulled into compliance with the rule as part of the supply chains of public companies. Gensler agreed with the legitimacy of their point, indicating that the SEC was looking at the issue. In addition, Gensler remarked, in what he acknowledged was perhaps a pitch to the Chamber, the best result for U.S. companies would be finalization of a climate disclosure rule by the SEC that is sustained in court. Otherwise, without a U.S. rule, he cautioned, U.S. companies—40% of the global capital market—will look to the disclosure regimes of other jurisdictions. An SEC rule sustained in court means that there can be discussions and negotiations about recognition and substituted compliance. (See this PubCo post.)
The article observes that "[s]caling back these rules would be a blow" to the climate agenda of the current administration, particularly as, for "most businesses, Scope 3 emissions represent more than 70% of their carbon footprint, according to consulting firm Deloitte." But Scope 3 requirements have come under fire from many companies and politicians—Republicans and even some Democrats and Independents. (See, e.g., these comments from Senator Amy Klobuchar and Senators Jon Tester and Kyrsten Sinema.) In particular, concerns have been raised about how the requirement might affect private companies in the value chain. However, both the EU rules and new California legislation mandate Scope 3 disclosure (see this PubCo post).
Reuters also reports that some lobbyists were pushing the SEC to require Scope 1 and Scope 2 disclosures only if material, but Reuters said that it "could not ascertain whether the latest draft changed the Scope 1 and 2 requirement threshold."
An SEC spokesperson told Reuters that adjustments to the proposal were based on public feedback, but otherwise declined to comment on the contents of the proposal. Nor would the SEC comment on the timing of potential adoption of the climate risk rules, telling Reuters that the SEC "moves to adopt rules only when the staff and the Commission think they are ready to be considered."
Reuters suggests that a reason for shedding some of these requirements may be the concern of some SEC officials that a sweeping set of disclosure requirements, including Scope 3, might be an invitation for litigation, "which, if successful, could tie the agency's hands when writing other rules." Those concerns may have been exacerbated by the recent SCOTUS decision giving its imprimatur to the "major questions" doctrine in West Virginia v EPA, as well as other issues raised by critics—both corporate and political—doubting the SEC's authority. (See this PubCo post.)
SideBar
While there have been a number of Congressional oversight hearings that addressed the SEC's climate proposal (see this PubCo post and this PubCo post,) the most recent was a House Financial Services subcommittee hearing in January. Billed as oversight, the hearing certainly highlighted the gauntlet that the SEC would have to run if the rules were adopted as proposed. Not that SEC Chair Gary Gensler wasn't already well aware that the climate proposal is facing a number of legal challenges. A common theme at the hearing was the issue of the SEC's legal authority to adopt the proposal. One witness contended that the SEC did not have the authority, citing the "major questions" doctrine enunciated by SCOTUS in West Virginia v. EPA. Not to mention that familiar refrain: that, if adopted, the proposal would, in his view, violate the First Amendment by compelling speech. What's more, the witness contended, Congress delegated authority over climate to the EPA, not the SEC. Besides, the SEC has already issued guidance on the disclosure issue, rendering the rules unnecessary. Moreover, he argued, the proposal would violate the APA because the SEC's cost-benefit analysis was inadequate, much like the analysis for SEC's stock repurchase disclosure rules that were just overturned by the Fifth Circuit (see this PubCo post).
Some of the subcommittee members also chimed in on the issue of legal authority. The subcommittee chair contended that nowhere had Congress delegated the issue of climate to the SEC, and SCOTUS was now in the process of reexamining the boundaries and the balance between agencies, Congress and the judiciary in the recent cases on Chevron deference. (See this PubCo post.) The chair also agreed about the inadequacy of the cost-benefit analysis, noting that the SEC's analysis had dramatically underestimated the potential costs involved. There may well be a number of SEC rules that are overturned on this basis, he said, consistent with the Fifth Circuit decision to vacate the SEC's stock repurchase disclosure rules because of an inadequate cost/benefit analysis. (See this PubCo post and this PubCo post.) Other Republican members agreed that the action by the Fifth Circuit may find parallels here. The simple finding that the rules may provide a benefit is just not enough; the SEC must substantiate that there is a need for the rule. For more, see this PubCo post.
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