The SEC’s climate disclosure rule has been a highly discussed topic across the political spectrum since its introduction in 2022. Due to criticism and multiple legal challenges, enforcement of the rule is currently on hold.
The enforcement was initiated in March of this year, as the SEC determined that its statute allowed it to enforce regulations requiring companies to disclose climate metrics for themselves and, as originally intended, all of their suppliers.
In a statement from March, SEC chairman Gary Gensler said the disclosure requirements will help improve the quality of information and reliability of data for investors regarding the risks and impacts of climate change.
“The rules will provide investors with consistent, comparable and decision-useful information, and issuers with clear reporting requirements,” Gensler’s statement said. “Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements, rather than on company websites, which will help make them more reliable.”
Now, with the overturning of the “Chevron deference” doctrine, regulators no longer own a de facto default interpretation of their statutes. The lack of deference creates a challenge to the climate disclosure requirement’s enforceability and legality.
A major portion of the enforcement is emission disclosures. Scope 3 emissions, or the combined emissions of the company and all of its subsidiaries and business partners, were ultimately eliminated from the final law. However, Scope 1 and Scope 2 emissions, both direct and indirect emissions respectively, are set to be required additions within SEC filings of public companies.
When asked about his belief that the SEC is misleading investors into believing climate risks are more significant than other risks, former SEC General Counsel Robert Stebbins made a pointed observation to Congress.
“I think that’s a concern that’s been raised,” he told South Carolina’s Republican representative William Timmons in early April.
“[The SEC is] trying to push certain behaviors as opposed to just regulating. By requiring disclosures of certain things, you’re trying to push boards and companies to act in a certain way rather than just doing what they know and what they consider to be in the best interest of the shareholders. And they certainly know better than the regulators and the regulatory agency.”
However, if the SEC goes back to the drawing board, CFOs and the C-suite will have to prepare accordingly. Erin Martin, a partner at Morgan Lewis who counsels clients on regulation, governance and disclosures, said in a recent virtual event hosted by ESG Dive, that although the SEC’s legal battle might take upwards of 18 months to work through, eventually, some pieces of its disclosure rule — if not all of it — “will be required.”
“In order to ensure that you can provide accurate information responsive to the SEC requests and rules … you need to have processes in place today to anticipate those rules so you can ensure that you have accurate disclosure that you’re providing, under the federal securities laws to your various stakeholders,” Martin said. “We can’t just sit and wait.”
Here are eight factors that CFOs must consider if the SEC’s climate disclosure rule is eliminated.
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Compliance costs will change. The elimination creates a potential annual aggregated rough estimate of $10 billion in total compliance costs. The logistics of data collection required labor from finance and accounting, and legal fees associated with these disclosures, are set to become a significant cost center for many organizations.
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Investor activism. According to some legal experts, the law had made some companies susceptible to climate activists and politically driven litigators to target companies as they see fit. CFOs, especially those in traditional industries such as manufacturing and oil and gas, will have to be prepared legally to stay ahead of any potential threats.
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“Greenwashing” incentives. This ruling potentially has a deterrent effect on incentives to invest in “green” companies who have “greenwashed” their way to claims of sustainability. It will also help promote the companies that are having successful sustainability campaigns by removing the dilution currently being caused by greenwashing.
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The IPO process. The disclosure rules previously had an adverse effect on IPOs because of the additional reported data required to go public. This is significant, especially as the London Stock Exchange pushes to improve its attractiveness to IPOs. If companies have more incentive to go public globally, and the NYSE continues to face challenges from the new Texas stock exchange, the traditional IPO market will lose a barrier to entry if the rule is repealed.
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Venture capital incentives. Venture capitalist money might have been less encouraged to flow through post-start-up, pre-IPO companies if they are unable to provide the data the climate disclosure rules require. If this rule is eliminated, the possibility of a successful exit for venture capitalists won’t be impacted by a company’s ability to report climate data.
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Labor demands and company talent pools. Emissions estimate standards alone will put more demand on accounting labor, which, as CFO.com has reported, is in dire need. Every CFO is well aware of the multiple talent shortages facing finance and accounting.
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Regulatory precedent. The elimination of the rule may put regulators in check and remove some of the uncertainty from potential regulation forecasting for CFOs. Multiple lawsuits argue the SEC has no legal right to regulate climate reporting, as the SEC statute is to keep shareholders informed. According to legal experts, this appears to be a matter between Congress and the EPA.
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Re-examination of SEC processes. Back in March, French Hill, a Republican representative from Arkansas and vice chair of the U.S. House Committee on Financial Services, told CNBC that he believes the entire ruling should go back to the drawing board after its change to remove Scope 3 emissions.
“It goes beyond the principles-based materiality that has been at the center of our public company disclosure,” said Hill. “In my view, chairman Gensler is not following the Administrative Procedure Act in this case, where he has a massive change in disclosure for public companies. He has made changes to his preliminary proposal, but I think he should repurpose it and take comments on the material changes he made.”
