Republican Attorneys General Fight SEC Over Corporate Climate Disclosures

Attorneys general from 24 Republican-controlled states stretching from Alaska to West Virginia wrote to the SEC last month, calling the agency’s climate disclosures plan “an ill-advised misadventure into environmental regulation.”

What is the SEC plan about climate risk disclosures? The SEC announced plans in March to require companies to disclose their climate risks within their operations as they compiled their annual reports and other required documents. Auditors or other experts will then analyze the data within those reports. At the core of the dispute is transparency over emissions produced by businesses in their supply chain, or their so-called Scope 3 emissions.

Who is in favor of this SEC plan for climate risk disclosures? The movement has been initiated by several big financial firms to use their economic power to reduce climate risk and stranded assets. The proposal has support from numerous environmental defenders, Democrats, and some of the largest public pension funds.

What is the background to the SEC proposed rule? The US is the largest historical emitter of greenhouse gases (GHGs), and the world has warmed by about 1.1 degrees Celsius since 1850, making the planet hotter than it’s been in at least 125,000 years. Corporate business practices have historically contributed the majority of these GHGs. Corporations produce just about everything we buy, use, and throw away and play an outsized role in driving global climate change. A 2019 report identified that just 100 companies have been responsible for 71% of all industrial emissions since human-driven climate change was officially recognized.

What will the SEC climate disclosures rule accomplish? If enacted, the SEC rule will assist investors to quantify and standardize financial risks posed by climate change and the carbon transition, according to Bloomberg Green. Issuers would be required to report how they identify and manage climate risks, in addition to certain audited GHG emissions data.

Who is opposed to this SEC plan? Several business lobbying groups and Republicans are fighting back against the plan.

What do these oppositional groups say is wrong with the SEC plan? The attorneys general who oppose the SEC plan list 3 primary concerns.

• The SEC lacks statutory authority to issue it.
• It violates the First Amendment.
• The rule doesn’t reflect reasoned decision-making and, so, would fail arbitrary and capricious review by the courts.

Let’s get more specific. Exactly what did the attorneys general say in their letter? They feel that the role of the SEC is to protect investors and financial markets. This rule, the Republican lawyers wrote in their June 15 letter, does neither, and, instead, advocates for “naked policy preferences far afield…. It’s up to lawmakers to decide major policy questions like these, not unelected agency administrators.”

What threats have the attorneys general made to back up their opposition to the SEC climate disclosures rule? If the SEC proposal goes into effect, these 29 attorneys general promise to remove their investments from banks and asset managers that are divesting from fossil fuels — and guns. They also signal that they’ll continue to fight back against all regulations designed to improve transparency around environmental, social, and governance (ESG) investing.

Is the trend of investors to water down the SEC rule? No. The Proxy Preview team recently released highlights of the 2022 proxy season, which so far has seen a record-breaking 282 votes and 34 majorities votes favoring disclosure and action on ESG shareholder resolutions. “It was a blow-out year for resolutions, with a nearly 60% increase in votes,” said Heidi Welsh, executive director of the Sustainable Investments Institute and co-author of Proxy Preview. Bloomberg Green adds that one of the biggest investors, the California State Teachers’ Retirement System, says the SEC should go even further in its rule and make Scope 3 emission disclosures mandatory for all publicly traded companies.

What are Scope 3 emissions? Until recently, most companies have focused on measuring emissions from their own operations and electricity consumption. But what about all of the emissions a company is responsible for outside of its own walls—from the goods it purchases to the disposal of the products it sells? The Greenhouse Gas Protocol outlines how the majority of total corporate emissions come from Scope 3 sources, which means many companies have been missing out on significant opportunities for improvement. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundary.

What’s the reaction of large investment firms to climate disclosure requirements? With hurricanes, floods, and rising temperatures in places such as Texas, large investment firms like BlackRock or JPMorgan Chase have increasingly nodded that they have no recourse but to assess and address climate risks if they are going to manage their financial risks, according to an analysis in the Washington Post.

What changes could occur after the SEC rule goes into effect? A sharper focus on ESG in private markets, emerging regulations such as European Union’s Sustainable Finance Disclosure Regulation (SFDR), and US announcements to achieve a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030, among others, are already combining to drive climate tech growth. Thousands of companies have made public commitments to net zero, set science-based targets, or sought to demonstrate their wider commitments to society through B Corp status.

Is the current language of the SEC corporate climate disclosure rule a done deal? Because the SEC has received dozens of letters from individuals and groups who outline their own recommendations about the climate disclosure requirements, changes in language and rigor may take place. The SEC will be holding a second vote to finalize the regulation.

Is there any indication that the SEC will relinquish the plan to require corporate climate disclosures? No. All indications are that the SEC will continue on with the rule implementation.

If the rule is enacted, is it likely there will be judicial challenges? The Supreme Court’s court right-wing activism — which seems to favor fossil capitalism over a zero emissions, renewable energy future — makes it likely that opponents may appeal the SEC rule.

When will we know the final SEC decision? In November — right around the time that midterm elections are taking place —  investors should see lots of media coverage of the final SEC plan for more comprehensive corporate climate disclosures.

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