The SEC unveiled its climate disclosure rule, which has broad backing from institutional investors and asset managers, in March 2022. The rule would require public companies to provide a host of climate-related information in their periodic reports and registration statements. It's almost certain to face a legal challenge when finalized.
The requirement that received the most significant debate to date centers on greenhouse gas emission disclosures. Under the proposal, public companies would be required to disclose the greenhouse gas emissions they generate or purchase, and the indirect emissions generated from a company's supply chain, if material, though smaller companies would be exempt from the latter requirement, referred to as Scope 3.
Charles Crain, vice president of domestic policy at the National Association of Manufacturers, told lawmakers at the hearing that the proposal would impose tremendous costs on manufacturers of all sizes and overwhelm investors with immaterial information.
"These flaws call into question the legality of the rule itself," Crain, one of three witnesses who opposed the proposal, told lawmakers. Under the Administrative Procedure Act, "Rules can't just ignore a major aspect of a rule-making problem — like the impact of Scope 3 on small businesses. They can't be based on faulty cost-benefit analysis. And, perhaps most importantly, they can't exceed an agency's statutory authority."
The lone witness who supported the proposal was George S. Georgiev, a law professor at Emory University. Democrats on the committee, who also back the proposal, spent the bulk of their time questioning Georgiev.
The professor said the SEC does have the authority to issue a climate disclosure rule based on the statues establishing the SEC and the authority Congress has granted the agency.
He added that the proposal's greenhouse gas emission requirements are intended to give investors an understanding of a given company's transition risk away from fossil fuels, and overall, the proposal is about information disclosure for purposes of capital market efficiency, investor protection, and capital formation.
Based on its latest regulatory agenda, the SEC will consider finalizing the proposal this spring, though the timeline has been pushed back before.
In October, California Gov. Gavin Newsom, a Democrat, signed two first-in-the-nation climate-related reporting bills that aim to increase transparency about greenhouse gas emissions and climate risk of certain companies operating in the state.