SEC Chair Gensler to Vote on Controversial Climate Disclosure Rule

The Securities and Exchange Commission is preparing to vote on a rule that would require companies to disclose the material risks posed by climate change. SEC Chair Gary Gensler is leading the discussion on this contentious proposal, which could have significant implications for corporate America.

President Biden's Stance on Climate Risk

President Joe Biden has emphasized the severity of climate risk, describing it as an "existential threat" that surpasses even the danger posed by nuclear war. This underscores the importance of the SEC's upcoming decision on climate disclosure regulations.

Timeline of the Proposal

The climate disclosure rule was initially introduced in March 2022. Gensler highlighted the substantial support from investors, amounting to trillions of dollars, for climate-related disclosures. The proposed rule aimed to enhance the efficiency and effectiveness of risk disclosure to meet investor demand.

Key Categories for Disclosure

The initial proposal outlined three categories for disclosure: Scope 1, involving direct emissions from a company's sources; Scope 2, encompassing indirect emissions such as energy generation; and Scope 3, which includes emissions from supply chains and product users. However, the Scope 3 disclosure requirements have faced opposition from corporations, citing excessive regulatory burden.

Unprecedented Public Response

The SEC received an extraordinary 15,000+ comment letters on the proposal, setting a record for public engagement on a single regulatory initiative. While some criticize the proposal as government overreach, others argue that it aligns with the SEC's tradition of mandating non-financial disclosures relevant to investors.

Industry Support and Opposition

Several companies, including Walmart, have voiced support for the SEC's objective of consistent and reliable climate-related disclosures. However, there is substantial opposition from the business community and Republican representatives, who view the rule as excessive regulatory intervention and a veiled push for a climate change agenda.

Potential Impact on Litigation

If the SEC proceeds with the rule, it may face a surge of litigation from corporate entities. Legal challenges could be based on the Administrative Procedure Act, with corporations questioning the regulatory necessity, cost-benefit analysis, and public input considerations. Additionally, legal precedents from a recent Supreme Court case may be cited to contest the SEC's authority in this domain.

Implications for Corporate America

Even with potential adjustments to the proposal, publicly traded companies can anticipate heightened regulatory requirements, increased operational costs, greater activist scrutiny, and elevated litigation risks. Implementation of the rule may also spawn a new industry specializing in climate change advisory and consulting services.

Impact on Exchange Traded Funds (ETFs)

The ETF community is closely monitoring the SEC's decision, as the proposed disclosure rule could supply an abundance of climate-related data essential for environmental, social, and governance ETFs. Improved data quality resulting from these disclosures is expected to enhance ESG strategies, despite the recent moderation in enthusiasm for ESG ETFs.

Reshaping ESG Fund Landscape

The disclosures mandated by the rule may have reverberations in the ESG fund landscape, as holdings' environmental credentials come under intensified scrutiny. Funds containing companies with tarnished environmental profiles based on disclosures could face criticism for failing to align with ESG principles, potentially affecting their market standing and investor confidence.