The Securities and Exchange Commission proposed a rule to compel companies to disclose climate-related risks, a major agenda item for the Biden administration that would lead to indirect pressure on the private sector to turn away from fossil fuels and reduce carbon emissions.
The rule proposed Monday, which is sure to meet legal and political resistance from the industry and Republicans, creates guidelines for how and what companies must report to investors about how their operations affect the climate. It says companies must report direct and indirect greenhouse gas emissions — reports that would be audited by an outside party.
“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” SEC Chairman Gary Gensler said.
Self-reporting of climate information has already become commonplace in business as investors increasingly embrace environmental, social, and governance standards.
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The biggest question about the rules was how far the SEC would go. Some climate activists were pushing for very stringent reporting requirements, while others feared making the rules onerous would involve too much red tape for companies to handle and would result in legal challenges for the SEC.
The SEC organizes corporate emissions into three categories, known as scopes. Scope 1 includes direct emissions, Scope 2 refers to indirect emissions, such as those involved in the use of electricity, and Scope 3 measures the emissions of other entities, such as suppliers or customers in a company’s value chain.
The Scope 3 reporting requirement, the most controversial, is set to be phased in gradually and includes carve-outs based on the size of a company. Scope 3 disclosures would also only apply to companies that consider such emissions to be “material” to investors.
Any rule must pass by a majority vote, meaning that all three Democrats, including Gensler, will have to agree on the climate disclosure rules. The commission only has one Republican member.
Gensler was reportedly concerned that a rule that was too tough might be successfully challenged in court and struck down, while the other two Democrats were on the side of more aggressive climate reporting guidelines.
Proponents of stricter reporting requirements see mitigating the risks posed by climate change as crucial because of the harm that climate change poses to society and the environment.
Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, and Jay Clayton, who served as SEC chairman under former President Donald Trump, preempted Monday’s announcement with a Wall Street Journal op-ed in which they branded the proposed rules as “overreach.”
“Setting climate policy is the job of lawmakers, not the SEC, whose role is to facilitate the investment decision-making process. Companies choose how best to comply and thrive under those policies, and investors decide which business strategies to back,” the duo wrote.
“Demanding that the SEC ‘act on climate change’ allows politicians to say that they are working on their constituents’ behalf without accepting responsibility for the hard choices involved in crafting policy,” they added, noting in the piece that taking the approach will “deservedly” draw lawsuits.
Sen. Pat Toomey, the ranking member of the Senate Banking Committee, put out a statement on Monday attacking the proposed rule for exceeding the bounds of the SEC’s mandate. He said the rule was a “thinly-veiled effort” to circumvent Congress and allow unelected regulators to set climate change policy.
“Complex political issues like global warming and energy security require tradeoffs. In a democratic society, those tradeoffs must be made by elected representatives who are accountable to the American people,” the Pennsylvania Republican said. “With inflation at a 40-year high, gas prices skyrocketing, and Russia waging an energy-funded war, the last thing the American people need are unelected regulators advancing policies by partisan vote that will cause energy costs to further rise.”
Sen. Sherrod Brown, the chairman of the Banking Committee and Toomey’s Democratic counterpart, praised the proposed rule in a statement issued on Monday. He said the SEC’s rule would protect workers, investors, and the economy from the risks posed by climate change.
“To protect Americans and our economy from climate change, we have to understand how climate risk affects our businesses, workers, and communities,” the Ohio Democrat said. “The SEC’s proposal is a step forward and would establish for the first time consistent data frameworks, balancing the need to accurately evaluate market risks while ensuring small businesses aren’t overburdened.”
The American Securities Association came out against the rule after it was released. ASA CEO Chris Iacovella said the proposed rule prioritizes the interests of the “ESG-Industrial Complex” over investors.
“Before any rule is finalized, the American public must understand exactly how the SEC plans to empirically prove its disclosures will impact global temperatures, our national security, and the cost of food, gas, heat, and other goods and services American citizens need to live,” Iacovella said in a statement. “It is important to remember that lawmaking in the ‘public interest’ is a power vested in Congress by the Constitution, not the administrative state.”
There has already been some state pushback to certain ESG policies enacted by some businesses.
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Texas Gov. Greg Abbott signed a bill that banned state investments in businesses that sever ties with fossil fuel companies, and West Virginia’s Senate passed a bill authorizing the state’s treasurer to make a list of firms that refuse to do business with oil and gas companies and to reject those companies from consideration for state financial contracts.
One of President Joe Biden’s climate agenda goals is to cut greenhouse gas emissions by more than half by the end of the decade when compared to 2005 levels.
