The Securities and Exchange Commission has issued dozens of rule proposals under the helm of Chairman Gary Gensler, but stakeholders are particularly focused on the most talked about and arguably most consequential proposal — its climate disclosure rule for public companies.
"It's arguably the most significant rule-making initiative by the SEC for public companies in a generation," said Michael R. Littenberg, New York-based partner at Ropes & Gray LLP, who counsels U.S. public companies.
There's also a "100%" chance that rule-making initiative will get challenged in court, Mr. Littenberg added. "The final rules will face a legal challenge even if they are significantly watered down," he said. "I think it's not so much the degree of 'are the rules extensive or less extensive' as to whether they face a challenge, I think the determinant is going to be whether you have rules in this area or don't have any rules."
The SEC unveiled the watershed proposal, which has broad backing from institutional investors and asset managers, in March. The proposal would require public nies to disclose a host of climate-related information in their registration statements and periodic reports, including the oversight and governance of climate-related risks by the company's board and management, and how any identified climate-related risks have affected or are likely to affect the company's strategy, business model and outlook, among other requirements.
"The proposed rules directly align with the enhanced disclosures we have been seeking in order to make more informed investment decisions and comply with the requirements of California state law," the $439.8 billion California Public Employees' Retirement System, Sacramento, said in a comment letter.
The requirement that received the most significant debate in the proposal's comment period, which ended in June, 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.
Some stakeholders in the business community and Republicans in Washington said the proposal exceeds the SEC's authority.
"The SEC is wading into controversial public policy debates that are far outside its mission and its expertise, and they're doing it without the legal authority to do so," said Sen. Pat Toomey, R-Pa., ranking member on the Senate Banking Committee, during a Sept. 15 hearing in which Mr. Gensler testified.
"If you go ahead with something substantively similar to the proposed rule, you're going to find a very unsympathetic court with regard to the authority that you have," Mr. Toomey told Mr. Gensler.
Leading House Republicans — Rep. Patrick McHenry of North Carolina, ranking member of the House Financial Services Committee; James Comer of Kentucky, ranking member on the House Oversight and Reform Committee; and Kay Granger of Texas, ranking member on the House Appropriations Committee — sent a Sept. 20 letter to Mr. Gensler stating the SEC doesn't have the authority to promulgate rules on a host of topics, including climate disclosure.
"Undertaking rule-making on these specific issues requires a 'clear delegation of authority' from Congress — authority of which Congress has not yet provided," the Republicans wrote.
The proposal is "unnecessarily broad, it's too prescriptive and it contemplates things that frankly are not material for investors," said Evan Williams, Washington-based senior director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.
With that type of pushback, Erin E. Martin, a Washington-based partner with law firm Morgan, Lewis & Bockius LLP who previously worked in the SEC's division of corporation finance, said "it's fair to say that it's way more likely than not that if it does go into effect substantially the same as it was proposed, it is going to be subject to significant legal challenge."
In his testimony before the Senate Banking Committee, Mr. Gensler said "investors today want to know about climate risk because it matters to the future path of the performance." He noted that many public companies are already disclosing climate-related information, but investors "would benefit if we could bring some consistency to this fragmented disclosure that's happening now."
Sylvain Vanston, Paris-based executive director of climate change investment research at MSCI Inc., said the "fact that the SEC is trying to get more disclosure will help investors."
Moreover, the cost of inaction is too great, and the proposal "positions investors and companies to reduce their financial risks," said Steven M. Rothstein, Boston-based managing director of the Ceres Accelerator for Sustainable Capital Markets, in a statement. Referring to Mr. Gensler's testimony, Mr. Rothstein said "current disclosure methods are 'fragmented,' and standardized mandatory disclosure will help bring greater consistency and stability to the market."
George B. Raine, Boston-based partner in Ropes & Gray's asset management group, said managers "who are looking for sustainable investments and climate-related investing are hungry for data and information."
On the whole, asset managers supported the proposal in comment letters, but many offered suggested changes in a final rule.
The largest money manager, BlackRock Inc., with $8.48 trillion in assets under management, said in its comment letter that it supports the SEC's goal having public companies provide investors "with more comparable and consistent climate-related disclosures," but also voiced concerns with parts of the proposal, including Scope 3 emissions reporting. "We do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control," BlackRock said.
The Scope 3 portion would require public companies that have set a greenhouse gas emissions target or goal that includes its supply chain emissions to disclose emissions generated from its supply chain.
"Scope 3 reporting is not ready for prime time. Full stop," Mr. Williams said. "There are companies that have done an excellent job of working to pioneer Scope 3 disclosures. Those companies are typically on the vanguard of disclosure as opposed to the rest of the business community for whom Scope 3 may not be a relevant metric or their investors may not be asking for that information."
The Chamber, in its comment letter, suggested Scope 3 disclosures should be entirely voluntary.
Ms. Martin said there's "a possibility" the Scope 3 provision will get "scaled back" in a final rule.
During his Sept. 15 testimony, Mr. Gensler was asked several times about Scope 3 and seemed open to adjusting parts of the proposal. "We're looking at the 14,000 comments, we're trying to balance this out," Mr. Gensler said. "The one thing is, is we have to ensure the public companies that are saying this or that about Scope 3 aren't, frankly, misleading the public."
The SEC in a final rule could potentially provide flexibility on how Scope 3 emissions are calculated and categorized or provide additional carve-outs for the types of companies that must provide the disclosures, Ms. Martin said.
The SEC's regulatory agenda calls for the publication of a final rule in October, but with the massive volume of comments received and delicate nature of the rule-making, sources expect a final rule in early 2023.
"When we get to the final rules, they're going to look in many respects, very different from the proposed rules," Mr. Littenberg said. "I don't think they'll be nearly as expensive in many regards."
Hazel Bradford contributed to this article.
