Everyone’s a Critic: SEC Proposes Rule for Climate-Related Disclosures

On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”), proposed a new climate reporting rule to provide investors with more climate-related data to make informed investments. (SEC). The announcement of this proposal has been met with serious reservations by industry lobbyists and Republican politicians who view the regulation as outside of the SEC’s authority. Id. Notably, General Motors (“GM”) strongly objected to the proposal and sent their CEO to meet with members of the SEC. (SEC). While many organizations have voiced their criticisms of the proposal, whether the SEC will take heed of these objections has yet to be seen.  

Under this proposed rule, the SEC would require companies to disclose indirect greenhouse gas emissions, also known as Scope 3 emissions, that will likely have a material impact on the company’s business, results of operations, or financial condition, on their annual 10-K reports. (SEC). Several large companies would have to go as far as to report Scope 3 emission data that comes from other firms within their supply chain. (Bain, Bloomberg Law). Additionally, the proposal would require companies to seek independent certification to report parts of their information, (Naishadham, AP News). These types of disclosures would be made in a company’s’ audited financial statements under three categories: financial impact metrics, expenditure metrics, and financial estimates and assumptions. (SEC)

The U.S. Chamber of Commerce (“USCC”), one of the largest lobbying groups in the U.S., commented that the Scope 3 disclosure requirements are counterproductive and mandate companies to provide vast amounts of data that is immaterial to prospective investors’ decision-making process. (Quaadman, U.S. Chamber of Commerce). The USCC argues that because the disclosure requirements are “speculative” and “uncertain,” they will not be useful to investors. Id. Furthermore, the USCC argues that the current proposed rule extends beyond the bounds of the SEC’s authority because the SEC lacks authority to levy climate and environmental-focused regulation in the fashion laid out in the proposal. Id. The USCC states the SEC repeatedly conflates the phrases, “protection of investors,” the SEC’s statutory obligation, and “investor demand,” when justifying the proposed regulations. Id. The USCC also noted the proposal does not appropriately consider the costs and burden of the Scope 3 disclosure requirements, highlighting that compliance with the proposed rule could cost one “well-known” company $15.6 million over a period of 5 years. Id.

Many large companies such as GM, Home Depot, and Best Buy, among others have met with members of the SEC to raise concerns about the proposed rule. In a comment letter to the SEC, GM argued that by requiring Scope 3 disclosures to be included in annual 10-K reports, the SEC would hinder companies in reporting accurate and reliable data. (Kim, General Motors). GM states that greenhouse gas emissions data is typically not available to most companies by the time they produce their annual 10-K reports—GM itself being no exception to this timing conflict. Id. GM also noted that while the SEC would permit companies to use Q4 emissions data estimates to mitigate 10-K filing timing concerns, Scope 3 emission data that comes from a third-party within a company’s supply chain is not frequently reported on a quarterly basis. Id. Thus making it difficult for companies like GM to gather the necessary data from a third party to make the disclosures available on its 10-K report. Id.

The SEC argues the disclosures under this proposal would provide “consistent, comparable, and reliable – and therefore decision-useful – information” for prospective and current investors to make informed decisions. (SEC). The SEC states that they have broad authority to issue disclosure requirements which are “necessary and appropriate in the public interest or for the protection of investors”. Id. The SEC particularly believes Scope 3 greenhouse emissions make up the bulk of various companies’ emissions and thus is important for investors to be aware of when deciding whether to invest in a company. (Ramonas, Bloomberg Law).  Additionally, the Chairperson of the SEC, Gary Gensler, claimed the proposal would aid companies in “more efficiently and effectively” disclosing their climate-related risks. (Bain, Bloomberg Law).

Considering the vast amount of criticism surrounding the rule proposal, the SEC should take into consideration the objections raised against the proposal and accordingly address the concerns of industry members. Although data regarding climate-related risks can be valuable information for potential and current investors to know, the method explored by the SEC leaves room for critics to attack its legality. While the SEC is allotted broad discretion in proposing rules that may affect an investor’s ability to make an informed judgment, using subjective terms such as “materiality” in determining whether disclosure is required, risks the rule becoming invalidated by a lawsuit. (Schmidt, Bloomberg Law). Even internally amongst the SEC there is disagreement over whether to keep the broad “materiality” language or to push for narrower disclosure verbiage. Id.  Additionally, this proposal could raise a “major questions” doctrine issue as critics have questioned whether this proposal serves to protect investors interests or focus on climate change. (Vallette, Mayer Brown). The major questions doctrine holds that “if an agency seeks to decide an issue of major national significance, its actions must be supported by clear statutory authorization.” (CRSReports). West Virginia Attorney General Patrick Morrisey alluded to such when he stated it was difficult for him to see how the SEC is “fulfilling its legal mandate by focusing on climate change”. (Ramonas, Bloomberg Law). The objections raised by industry members and, to a lesser extent, from within the SEC, demonstrate that revisions should be made before the final rule.