Even with more stringent provisions left out, critics torch SEC's final climate disclosure rule

The Securities and Exchange Commission (SEC) Wednesday adopted final rules regarding climate disclosures.

While the rules left out some of the more burdensome reporting requirements for greenhouse gas emissions, disagreements remained between commissioners, resulting in a narrow 3-to-2 vote.

“The commission could trigger a hodgepodge of requirements tailored to meet the demands of a vast and ever expanding panoply of special interests,” Commissioner Hester Peirce warned in explaining her dissenting opinion during Wednesday’s hearing.

24,000 comments

The commission didn’t adopt the Scope 3 emissions, which would have required companies registered with the SEC to calculate and report emissions that occur throughout the entire supply chain of a product through its end use by the consumer.

Critics had argued that such a requirement would be costly and difficult to comply with.

“Small non-public companies will be harmed by facing higher compliance costs as public companies request non-material information on Scope 3 GHG emissions, or risk the loss of business if they fail to provide such information,” a coalition of Senate Republicans warned in a comment letter on the proposed rules.

Commission Chair Gary Gensler said the SEC received 24,000 comments on the proposed rules. “We got a flurry of additional comments over the last 72 hours,” Gensler said.

Most critics were no more comfortable with the scaled-back version of the rule that the SEC passed Wednesday.

Will Hild, executive director of Consumers’ Research, a consumer's advocacy nonprofit, said in a statement that the passage of the rules marks “the darkest day in the history of the SEC.”

“While this rule will undoubtedly be challenged and hopefully overturned, the SEC embarrassed itself today. By bending to extreme climate activists and their grifting Wall Street allies, Gensler’s SEC has forever undermined its respectability,” Hild said.

Derek Kreiflers, CEO of the State Financial Officers Foundation said in a statement that the rules will have an overall negative impact on the economy. “American businesses, large and small … will be forced to take resources that could have gone to keeping prices low or reinvesting in the American economy, and instead waste them on staying in compliance with a rule that has no business existing in the first place,” Kreiflers said.

Commissioner Peirce raised concerns in Wednesday’s hearing about the SEC exceeding its authority with the final rules, a point other critics have raised, including House Majority Leader Steve Scalise, R-La.

"Despite no clear Congressional authorization, the SEC has announced its intention to become a climate regulator with this rulemaking. Instead of protecting investors and promoting our capital markets, the SEC will use its disclosure regime to endorse the latest preferences of radical ESG activists,” Scalise said in a statement.

Within hours of the rules passing, a coalition of 10 states filed legal challenges to the new regulations, according to The Hill.

Senate Banking Committee ranking member Tim Scott, R-S.C. says he will fight the rules under the Congressional Review Act, The Hill reported, which allows Congress to overturn through the passage of a joint resolution.

Consistency

Under the final rules that the SEC passed Monday, large and mid-sized companies will need to report their Scope 1 emissions, which are those that come directly from the company’s operations, as well as their Scope 2 emissions, which are those that come from their purchase of electricity, heating or cooling.

The companies are only required to report those emissions when those emissions are considered material. The SEC considers a matter "material" if there is a substantial likelihood that a reasonable person would consider it important.

For large companies, the new requirements start in fiscal year 2026, and then the new rules will apply to mid-sized companies in fiscal year 2028. The final rules don’t require a determination that any risk being reported is due to climate change, Erik Gerding, directors of the Division of Corporation Finance, explained. They only require disclosures about climate-related risks.

Gensler said that one survey showed that 90% of companies on the Russell 1000 — the top 1,000 stocks on the Russell index — are voluntarily providing public disclosure of climate-related information. The new rules, Gensler said, would provide standards and consistency across companies making these disclosures.

“There are standard controls and procedures for filings, unlike for things just posted on a website,” Gensler said.

‘Fundamental flaw’

Peirce said that the final rules, rather than adhering to high-level general statements, move toward prescriptive climate-related regulations. “While the commission has decorated the final rule with materiality ribbons, the rule embraces materiality and name only,” Peirce said.

Peirce argued that, while the final rule has differences from the proposed rule, it would still “spam” investors with information that will “overwhelm investors, not inform them.”

“These changes do not alter the rules’ fundamental flaw — its insistence that climate issues deserve special treatment and disproportionate space in commission disclosures,” Peirce added.

She also said the commission hasn’t persuasively explained why the previous rules weren’t adequate to ensure companies disclose climate-related information that an objectively reasonable investor needs. “Congress did not create this agency to satisfy the wants of every investor, but to serve the interests of the objectively reasonable investor seeking or return on her capital,” Peirce argued.

Commissioner Mark Uyeda, who cast the second vote against adopting the final rules, said that the rule is “climate regulation promulgated under the commission seal.”

“Today's rule is the culmination of efforts by various interests to hijack and use the federal securities laws like climate related goals,” Uyeda said.

Red ink

Uyeda pointed out that the final rule had departed significantly in a number of ways from the proposed rule. A comparison of the proposed rule with the final rule, he said, would show page after page of “extensive red ink reflecting strikethroughs and additions.”

“I’m worried that my color toner cartridge is going to run out,” Uyeda said.

Considering so many changes, Uyeda said, the commission should have resubmitted another proposed rule draft, updated the economic impact analysis of the rule, and solicited further public comment before adopting a final rule.

“Doing so would have provided the public an opportunity to focus on the aspects of the proposal that they did not initially consider, and submit comments on revised requirements,” Uyeda said. By diverting companies’ time and resources to the new reporting requirements, he said, companies will have less time to pay attention to other matters with more immediate impacts.

O.H. Skinner, executive director of the Alliance For Consumers said in a statement that the disclosure rules leave companies vulnerable to a wave of lawsuits designed to force companies to comply with climate activists’ wishes.

“The SEC’s new rule empowers activists, ideological bureaucrats, and trial lawyers to steer climate and energy policy under the guise of financial regulation while funneling money to political donations….Here is hoping that a wave of lawsuits stops this Shady Trial Lawyer giveaway and saves consumers,” Skinner said.