Corporate reaction to SEC climate plan

Gary Gensler, Chairman of the United States Securities and Exchange Commission. Photo: Diego M. Radzinschi/ALM

By November, around the time the U.S. midterm elections are held, investors will likely learn the fate of the U.S. Securities and Exchange Commission’s plan for more comprehensive climate information. companies.

The SEC announced in March its intention to require companies to disclose the risks that the climate crisis poses to their operations in their annual reports and other documents. He calls for auditors or other experts to review the data and also wants more companies to disclose the emissions produced by companies in their supply chain, or their so-called scope 3 emissions.

Although the proposal has the support of environmental advocates, Democrats and some of the largest public pension funds, it has been roundly rejected by many corporate and Republican lobby groups who argue that the development of such rules are beyond the jurisdiction of the SEC.

Over the past four months, the agency has received dozens of letters from individuals and groups making their own recommendations on how to proceed. It’s possible the SEC will water down the details of the plan before holding a second vote to finalize the settlement. But the idea that the SEC will withdraw its plan is arguably near zero, even as the expected political storm from right-wing groups grows.

Attorneys general in 24 Republican-controlled states stretching from Alaska to West Virginia wrote to the SEC last month, calling the climate-related disclosure rule “a misguided misadventure in environmental regulation.”

They argue that Congress created the SEC to protect investors and financial markets, and that (despite accelerating damage from global warming) this proposal does neither. Instead, he takes “naked political preferences” very far.

“Major policy issues like these are for lawmakers to decide, not for unelected agency directors,” the Republican lawyers wrote in their June 15 letter.

Ultimately, the states said they opposed the rule based on three allegations: first, that the SEC lacked statutory authority to issue it; second, it violates the First Amendment; and third, the rule does not reflect reasoned decision-making and would therefore fail arbitrary and capricious scrutiny by the courts.

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Investors, whom the rule is meant to protect, don’t see it the same way. One of the largest, the California State Teachers’ Retirement System, says the SEC should take its rule even further and make Scope 3 emissions disclosure mandatory for all publicly traded companies.

Rob Du Boff, senior ESG analyst at Bloomberg Intelligence, notes that while there is genuine economic anxiety about the carbon transition, the biggest motivating factor is politics, pure and simple.

“Elected officials, especially in energy-producing states, are leveraging budgets and regulation to push back,” he says.

They have threatened to sever ties with banks and asset managers seen as allocating capital to industries such as fossil fuels and firearms, while opposing regulations designed to improve transparency in environmental investments , social and governance, said Du Boff.

“We think the overall ESG rollback is unfounded and could ultimately blind pension funds to long-term risks like climate change and inequality,” he says.

And the facts are the facts. The United States is the largest historical emitter of greenhouse gases, and the world has warmed about 1.1 degrees Celsius since 1850, making the planet warmer than it has been since at less than 125,000 years old.

Du Boff says the SEC’s proposal aims to help investors quantify and normalize the financial risks posed by climate change and the carbon transition. Indeed, issuers must report how they identify and manage climate risks, in addition to certain verified data on greenhouse gas emissions, he says.

Legal challenges are inevitable, given the huge cost of implementation (estimated at $18.4 billion over the first six years), and the challengers may ultimately succeed in overturning the rule, given the supermajority named by the Republicans who control the Supreme Court.

“The asset management industry has largely reached consensus that climate risk is financial risk, so it’s disappointing that politicians feel the need to meddle to earn points with their electorate,” says Du Boff. “The irony is that they use the old ‘stay in your lane’ argument, disregarding their own advice.”

Tim Quinson reports for Bloomberg News.

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