Today’s rule is the culmination of efforts by various interests to hijack and use the federal securities laws for their climate-related goals. In doing so, they have created a roadmap for others to abuse the Commission’s disclosure regime to achieve their own political and social goals. First, they purchase shares in public companies under the guise of becoming “investors,” but not with the primary intention of seeking financial return. Rather, they use their holdings as a means to force companies to disclose information related to political and social issues important to them but that may not be relevant to those companies’ business or shareholders generally. After some companies capitulate to their demands, they ask the Commission to adopt rules requiring the disclosure from all companies. Citing such “investor demand” for the information and the need to have “consistent and comparable” disclosure, a politically-oriented Commission might pursue such a rulemaking. If it does, then the result is using disclosure not as a tool to aid investors, but to bypass Congress to achieve political and social change without the corresponding accountability to the electorate.

The Commission is a securities regulator without statutory authority or expertise to address political and social issues. In adopting new disclosure rules, the Commission should understand the informational needs of a “reasonable investor.” This is precisely what the Supreme Court called for in TSC Industries v. Northway, when it stated that “the question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” [1] The Court further noted that disclosure policy embodied in regulation is “not without limit.”[2] Thus, before requiring disclosure, the Commission should assess whether the benefits of the information to the reasonable investor outweigh the costs of producing the disclosure. Unfortunately, this analysis did not occur for today’s rulemaking. Instead, the Commission ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change. If left unchecked, we may see further misuse of the Commission’s rules for political and social issues and an erosion of the agency’s reputation as an independent financial regulator.

A Major Question Implicated

The Commission asserts that the federal securities laws allow it to require information “necessary or appropriate in the public interest or for the protection of investors” and explains how it has relied on these provisions over the past 90 years to adopt various disclosure rules.[3] But the Supreme Court has made clear that a “colorable textual basis” may be insufficient to support an assertion of regulatory authority, especially if Congress was unlikely “to delegate a policy decision of such economic and political magnitude to [the] administrative agency.” [4] In explaining the major questions doctrine, the Court stated that “[e]traordinary grants of regulatory authority are rarely accomplished through ‘modest word,’ ‘vague terms,’ or ‘subtle device[s].’”[5]

Today’s rulemaking is an extraordinary exercise of regulatory authority by the Commission that involves an economically and politically significant policy decision. The Commission adopts an entirely new subpart of Regulation S-K and an entirely new article of Regulation S-X for one topic – climate change – applicable to all public companies. In doing so, the rulemaking elevates climate above nearly all other issues facing public companies.

In no other context is a company required to provide an explanation of expenses that exceed one percent of income before taxes and analyze the significant contributing factor to the expense. For no other risk does the Commission require prescriptive, forward-looking disclosure of the risk’s impacts on the company’s strategy, business model, outlook, financial planning, and capital allocation. Today’s rule also requires disclosure of climate-related targets and goals, even though the Commission has no similar requirements for a company’s targets and goals related to other, more important matters affecting the company, such as financial performance, product development, customer acquisition, or market expansion. Finally, the requirement to disclose GHG emissions and obtain an attestation report on such disclosure is in a class of its own without comparison in the Commission’s disclosure regime.

The Commission does not articulate any limiting principle for its claimed authority and why today’s rule is within that limiting principle. Perhaps the Commission does not believe that there are limitations. The Supreme Court has stated that, in extraordinary cases – which I believe includes today’s rule – an agency must cite to “something more than a merely plausible textual basis for [its] action. The agency instead must point to ‘clear congressional authorization’ for the power it claims.”[6] The Commission has not done so for this rulemaking.

A Flawed Process

Even without the major questions doctrine and concerns about statutory authority, the Commission conducted a flawed process by not re-proposing the rule, raising the question of whether appropriate notice was provided under the Administrative Procedure Act.[7]

The Commission proposed this rulemaking nearly two years ago and received thousands of comment letters. Many commenters focused on the controversial part to require companies to disclose their scope 3 emissions. Given the proposal’s expansive nature and its hundreds of requests for feedback, most commenters did not focus on, or address, every single issue or alternative raised. By removing the requirement to disclose scope 3 emissions and making numerous other substantive changes, the final rule differs significantly from the proposal. One only need to run a comparison of the proposed rule text and the final rule text to visualize page after page of extensive red ink reflecting strikethroughs and additions.

The Commission has essentially admitted that the proposal did not get it right. Accordingly, the Commission should have re-proposed this rule with an updated economic analysis and solicited additional public feedback. Doing so would have provided the public with an opportunity to focus on aspects of the proposal that they did not initially consider and submit comments on any revised requirements. At the minimum, a re-proposal could have resulted in a better estimate of the costs and benefits associated with this rulemaking. As the release notes, “[m]any commenters provided aggregate cost estimates that did not include certain elements required by the final rules, or included other elements that are not required in the final rules [and it was] difficult to use these cost estimates to quantify the direct costs of the final rules.”[8]

An Intrusion into the Boardroom

The practical effect of today’s rule is that companies’ boards and management will need to spend more time and resources to think about, assess, and discuss climate change, even if no disclosure is ultimately made. Audit committees will be required to determine what it means to have had a “severe weather event and other natural condition.” Lawyers and accountants will need to become well versed in hurricane categories and the Enhanced Fujita Scale.[9] But there is an opportunity cost to all of this. By forcing companies to spend more time and resources on climate discussions, the Commission creates the risk that companies may ignore, or not pay sufficient attention to, other matters that could have greater and more immediate impacts.

After the rule goes into effect, companies will have a duty to provide prescriptive, climate-related disclosure knowing that any non-disclosure, including assessments of materiality, will be judged in hindsight. To avoid potential liability, companies may voluntarily disclose climate-related information despite concluding that the information is immaterial. Even when a company does not ultimately make any disclosure, it will have spent considerable resources to gather and assess climate-related information, including potentially measuring its GHG emissions, in order to have effective disclosure controls and procedures and, where applicable, internal controls over financial reporting.[10] The takeaway is that climate will be nearly everything, everywhere, all at once for public companies.

The primary financial beneficiaries of today’s rulemaking will be the ESG consultants, auditors, attestation providers, and attorneys who will advise on compliance with the new provisions. Keep in mind that not one dime of money spent on compliance will be used for actual reductions in GHG emissions, and that shareholders will be footing this bill.

A Lack of Exemptions

Today’s rule will eventually be felt by all public companies. While the Commission could have exempted smaller reporting companies and emerging growth companies (“EGCs”) from all aspects of today’s rule, it limited the relief only to disclosure of GHG emissions. EGCs did not receive an “on-ramp” for the disclosure requirements, which was the impetus for more companies to go public as part of the JOBS Act.[11] Accordingly, after the compliance date for EGCs begins, they will need to provide climate-related disclosure on day one. Also, do not be fooled into thinking that limiting GHG emission disclosure to large accelerated filers and accelerated filers provides meaningful relief because a company with a public float as low as $250 million may still be required to report its GHG emissions.[12]

Finally, the Commission continues to diverge from its historic practice of largely deferring to the disclosures made by foreign private issuers (“FPIs”) pursuant to their home country reporting requirements. For climate-related disclosure, many foreign jurisdictions have adopted, or announced plans to adopt, their own disclosure requirements.[13] The Commission could have eased the reporting burdens of FPIs and made the U.S. capital markets more attractive to them by allowing these foreign companies to report climate-related information pursuant to their home country requirements. Such an approach may also encourage foreign regulators to allow mutual recognition of the Commission’s rules with respect to U.S. companies with foreign operations. Unfortunately, the Commission’s decision today may subject U.S. companies to multiple regulations on climate disclosure and make the U.S. capital markets less attractive to foreign companies.

A Thank You to the Staff

Because of the concerns that I have with today’s rule, I am unable to support it. There are many important political and social issues facing the country, but the place to resolve those concerns is in the halls of Congress, not the Commission.

I thank the staff of the Division of Corporation Finance (“CorpFin”), the Office of the Chief Accountant (“OCA”), the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work. Many staff members have been working on this rulemaking for more than two years. During this time, they have reviewed thousands of comment letters, met with the public, and worked through different iterations of the rule. While I disagree with the procedural and policy aspects of today’s rulemaking, the staff’s efforts to complete the rulemaking should be recognized. I would especially like to thank Luna Bloom and Valian Afshar from CorpFin and Shaz Niazi, Erin Nelson, and Meagan Van Orden from OCA for their engagement with me and my office.

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