As governments across the globe and at every level—from local to national—work to find productive means of addressing the increasing threats posed by climate change, a new government agency entered the fray last spring: the SEC. In March, the SEC proposed that companies begin providing climate-related information disclosures. The potential implementation of the rule, however, has now been delayed—the SEC had to reopen the comment period due to a technical glitch, and it now has to account for a Supreme Court decision in West Virginia v. EPA, 597 U.S. ___ (2022), that had not been released when the original disclosure was initially proposed.
The SEC’s proposed climate disclosure rule would require companies to disclose climate-related risks that are “reasonably likely to have a material impact on their business, result of operations, or financial condition” along with climate-related financial information and a disclosure of a company’s greenhouse gas emissions. Other countries, from Japan to New Zealand to the UK, are working on similar disclosures. The SEC’s proposed rule is based on voluntary guidelines issued by the Task Force on Climate-related Financial Disclosures (“TCFD”) that were endorsed by 2,600 companies in 2021. Last year, the International Financial Reports Standing Foundation likewise created another board, the International Sustainability Standards Board, which will also be releasing similar guidelines.
When the SEC creates a new rule or regulation, it goes through a rulemaking process that normally begins with a rule proposal, followed by a public comment period. After all comment submissions have been considered, the rule is then finalized and published. Any new SEC rule obviously generates a strong reaction from the companies that will be obligated to comply with the rule, but this proposal has drawn a particularly strong response. The SEC’s justification for this proposed rule, also relied upon by the TCFD, is that investors need to be aware of the full scope of a potential investment’s risks and opportunities, and climate-related issues can strongly influence both sides of that coin. The proposal has generated significant comments, with opponents arguing about lack of clarity for the required disclosures, the cost and time required to make such disclosures, and disputes over whether the SEC has the authority to mandate such disclosures.
It is these two points that have caused—and may continue to cause—delays in implementing the rule. First, the SEC announced earlier this month that it would need to re-open the comment period for the climate disclosure, because of technical issues related to previous comment submissions. That period has now closed, and the SEC will need to now take into account these new comments.
The bigger potential roadblock to implementation is whether the SEC has the authority to mandate such disclosures. The SEC is an independent federal agency responsible for enforcing laws against market manipulation. The SEC’s duties include: i) ensuring that public companies, fund and asset managers, and investment professionals regularly disclose their significant financial information; ii) facilitating and overseeing avenues for companies and entrepreneurs to raise capital; and, iii) monitoring financial markets so it can update its rules, regulations, and policies to protect investors and maintain efficiency. All companies with publicly traded securities, as well as privately held companies that exceed certain thresholds, must comply with the SEC’s financial disclosure requirements. Given the agency’s broad authority, some argue that the SEC is acting in line with its historical role and within its scope by requiring financial disclosures related to climate change. The West Virginia Attorney General, however, has already declared his intent to challenge the new climate disclosure rule, if implemented, using a rationale similar to the one that won the day for West Virginia in its suit against the EPA.
At this point, with the second comment period having just closed, we will now wait to see what rule, if any, the SEC ultimately publishes, with such a rule possibly being published in the next several weeks. If the SEC follows through with this rule, expect that there will be legal challenges to its authority to do so. Even if the Supreme Court ultimately holds that the SEC exceeded its authority, however, there are enough voluntary and international reporting guidelines being implemented that many companies will have to begin preparing themselves to evaluate—and report on—the risks and opportunities they face in a world with an already changing climate.