The Biden administration on March 6 finalized a controversial rule requiring companies to disclose climate-related financial risks, drawing a flurry of reactions. Environmental groups complained it wasn’t tough enough, while Republican leaders in 10 states have already filed suit to block it.
The Securities and Exchange Commission (SEC) voted 3–2 along party lines on March 6 to approve the climate disclosure rule, which sets more stringent standards for how companies communicate with investors about greenhouse gas emissions and weather-related risks.
“Today, the Biden administration has once again gone on the attack against America’s energy industry,” West Virginia Attorney General Patrick Morrisey, a Republican who’s leading a coalition of 10 states in a legal challenge to the new rule, said at a press conference.
Calling the rule perhaps “one of the most egregious attempts yet” to undercut U.S. fossil fuel production, Mr. Morrisey alleged that the Biden administration is using an agency tasked with fighting financial improprieties as a “backdoor” to undermine the energy industry.
All three Democratic members of the SEC voted in favor of the rule, including SEC Chair Gary Gensler, who said that demand for the new standards is driven by investors and issuers alike.
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions,” Mr. Gensler said in a statement.
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Both Republican SEC commissioners voted against the rule, which imposes more stringent requirements on publicly traded companies to say more in their financial statements about climate-related risks to their operations. It also requires such companies to disclose information about their own contributions to “climate change.”SEC Commissioner Hester Peirce, a Republican who opposed the rule, said it would be burdensome and expensive for companies and that it would also trigger a flood of inconsistent information that would overwhelm investors rather than inform them.
“However well-intentioned, these particularized interests don’t justify forcing investors who don’t share them to foot the bill,” Ms. Peirce said.
“This is yet another attempt to advance an agenda without statutory authority, and I for one am not going to let that happen,” Mr. Morrisey said at the March 6 press conference, while announcing that a coalition of 10 states has filed a petition for review of the new rule by the U.S. Court of Appeals for the 11th Circuit.
The version of the rule adopted on March 6 is weaker than an earlier draft, with the narrowed rule dropping requirements that companies report some indirect emissions, known as Scope 3.
Companies and business groups were fiercely opposed to the Scope 3 emissions reporting requirement when the rule was first proposed, arguing it would be difficult to quantify indirect emissions, such as those that arise when consumers use a given product, such as gasoline, or emissions generated by manufacturers lower down on the supply chain, such as those that make car parts.
Mr. Morrisey said that the new rule has been slightly watered down from its original proposal but is still “wildly in defect and illegal and unconstitutional.”
“We believe we’re going to proceed in court and prevail,” he said.
By contrast, environmental groups, including Friends of the Earth and Earthjustice, expressed dismay that the rule didn’t go as far as they wanted.
Rule in Focus
The new rule is also weaker than the original proposal by allowing companies to decide for themselves which of their direct (Scope 1 and 2) greenhouse gas emissions are “material” and, therefore, subject to disclosure.SEC Commissioner Caroline Crenshaw, a Democrat, called the rule “a bare minimum” that omits important disclosures while calling Scope 3 emissions a “key metric for investors in understanding climate risk.”
“Today’s recommendation adopts an unnecessarily limited version of these disclosures,” she said.
Earthjustice said that the Sierra Club and Sierra Club Foundation, which the group represents, will take action to defend the SEC’s authority to implement the new rule while potentially mounting a legal challenge to the SEC’s “arbitrary” removal of some of the tougher provisions.
Former SEC Chair Jay Clayton, a Republican who was appointed by then-President Donald Trump, told NBC in an interview that he believes the SEC’s decision to move into the realm of championing climate-related actions amounts to overreach.
“The big issue here ... is that’s not really the SEC purview,” Mr. Clayton said.
Climate-related issues, in particular, climate-action proposals, “are extremely profound questions that involve national security, energy policy, financial policy,” he said. “Getting them wrong, as what’s happened in my view in Europe can be hugely costly.”
Mr. Clayton argued that if companies have climate risk that’s material for investment decisions, they’re already required to disclose it. He said the proposal creates a whole new disclosure framework that isn’t really about investing but about climate transition and climate risk more broadly.
“The big issue,” he said, is that this “is not really the SEC’s purview. It’s not the SEC’s expertise. And this is against the background where administrative agencies are seen by the courts and others to be greatly exceeding and testing their authority.”
He said his fear is that the finalized rule will undermine the SEC’s authority “because a court is going to say, ‘You’ve just overstepped your bounds.’”
The proposed rules would include a phase-in period for all registrants, according to the SEC, with the compliance date dependent on the registrant’s filer status.
The rule has a 30-day comment period after its publication in the Federal Register or 60 days after the date of issuance and publication on SEC.gov, whichever is longer.
