House Committee on Financial Services Subcommittee on Oversight & Investigations: Oversight of the SEC’s Proposed Climate Disclosure Rule: A Future of Legal Hurdles

House Committee on Financial Services
Subcommittee on Oversight & Investigations
Oversight of the SEC’s Proposed Climate Disclosure Rule: A Future of Legal Hurdles
Thursday, January 18, 2024

Topline

Republicans blasted the SEC’s proposed climate disclosure rule and argued that the rule was outside of the SEC’s mandate.
Democrats expressed their strong support for the proposed rule, citing its importance and benefit to investors.

Witnesses

Charles Crain, Vice President, Domestic Policy, National Association of Manufacturers
Lawrence Cunningham, Special Counsel, Mayer Brown
Bill Schultz, Vice President, Schultz Fruitridge Farms, Inc.
George Georgiev, Associate Professor of Law, Emory University School of Law

Opening Statements

Subcommittee Chairman Bill Huizenga (R-Mich.)

In his opening statement, Huizenga clarified that the hearing was not a debate on climate change, but on whether the SEC has the authority to require the disclosures included in its Climate Disclosure Rule. He lamented that the SEC wildly underestimated the costs the rule would have for public and private entities. Huizenga said that rather than conducting a thorough economic analysis of the rule, the SEC relied on left-leaning think tanks and environmental groups. He added that the SEC has neither addressed nor considered how Scope 2 and Scope 3 requirements of the rule would impact small businesses that can’t afford legal or compliance departments.

Huizenga noted the United States Court of Appeals for the Fifth Circuit ruled against a separate SEC disclosure rule last year concerning share repurchase disclosures and found that the SEC violated the Administrative Procedure Act (APA) by failing to respond to public comments or complete a proper cost-benefit analysis. He cited West Virginia v. EPA and asked whether the SEC has the Congressional authority to mandate disclosures related to climate change, especially as Congress has not given the SEC authority to make these mandates. Huizenga said Congress is waiting on the Supreme Court to rule on the boundaries of the Chevron doctrine. He concluded by lamenting Chair Gensler’s intentional slow walking of the investigation.

Subcommittee Ranking Member Al Green (D-Texas)

In his opening statement, Green blasted the hearing as another assault on investor protections and climate change disclosures. He emphasized that climate change affects business operations, profits, and risks. Green noted existing climate risk disclosures are vague, not standardized, and don’t provide investors with a good sense of the scale of risk a company faces. He explained that the SEC rule is intended to provide standardization and transparency, because most investors feel that companies need to share more climate risk information, and most investors are more likely to invest in companies that disclose this information. Green concluded by questioning why Republicans are criticizing the rule without offering any serious alternatives.

Testimony

Charles Crain, Vice President, Domestic Policy, National Association of Manufacturers

In his testimony, Crain explained that American manufacturers spend $350 billion on regulatory costs, which represents a 30 percent increase from a decade ago. He warned that the SEC’s climate disclosure rule would impose tremendous costs on manufacturers and overwhelm investors with immaterial information. Crain criticized the SEC for failing to do the work to show that the rule’s benefits outweigh the costs or that the rule is within the SEC’s legal authorities. He said requiring large companies to report their supply chain emissions, as required by Scope 3, creates a significant burden that will fall on their small and privately held suppliers. Crain warned that small businesses would face the untenable choice between buying new expensive equipment or losing customers.

Crain said the SEC admitted that it can’t fully and accurately predict the costs of Scope 3 reporting. He blasted the SEC for failing to offer any flexibility or tailoring for small businesses and for drastically underestimated auditing costs. Crain explained that under the APA, agencies cannot ignore regulatory impacts, use faulty cost-benefit analysis, or exceed their mandated authorities. He concluded that the SEC doesn’t have the authority to set climate policy and warned that if the rule is finalized, small businesses and their workers will be the most affected.

Lawrence Cunningham, Special Counsel, Mayer Brown

In his testimony, Cunningham explained the proposed rule is outside of the SEC’s authority and doesn’t address ordinary, individual investors who need protection. He described the rule as unnecessary and harmful, and noted existing SEC rules already require companies to disclose all material risks. Cunningham said that while companies should be required to disclose climate impacts, they should not be required to disclose climate risks. He added that the rule would cost companies millions of dollars, hurting investors, without creating an investor or climate benefit. He warned the rule would lead to lawsuits concerning disclosure adequacy, which will be costly even when baseless.

Crain said the SEC’s proposed climate rule would discourage companies from being public, which would reduce investment opportunities. He explained how the rule faces legal challenges under the major questions doctrine for a lack of explicit Congressional authorization, in addition to challenges under the First Amendment by compelling company speech on controversial matters, and legal challenges under the APA. Crain concluded that the SEC’s proposed climate disclosure rule is an undemocratic power grab which would divert resources from the SEC’s real mission.

Bill Schultz, Vice President, Schultz Fruitridge Farms, Inc.

In his testimony, Schultz warned that Scope 3 reporting requirements could negatively impact his third-generation family farm, while providing their big competitors with an advantage. He said the rule would be a crushing burden for farmers and explained that while agricultural production is complicated and nuanced, the SEC’s rule does not account for that. He concluded by warning that the rule would make the already high prices facing Americans at the supermarket even worse.

George Georgiev, Associate Professor of Law, Emory University School of Law

In his testimony, Georgiev said the SEC’s climate work is important and misunderstood. He explained that the rule was designed to provide investors with information and does not create substantive climate regulations for businesses. Georgiev said the fact that non-investor entities are interested in this discussion should not be cause for us to see this policy as suspect and noted the near universal investor support for this rule. He added that companies across America in different sectors have come out in support of this rule, as current voluntary disclosures create legal risks and lack standardization. Georgiev said retail investors would benefit from the rule, as disclosures help ensure that security prices are accurate. He concluded by noting that the SEC is actively working to take flexibility and liability concerns into consideration.

Question & Answer

Support for the Climate Rule

Rep. Sylvia Garcia (D-Texas) explained that while disclosures help companies track their performance and goals, voluntary disclosures don’t provide enough information. She asked why so many investors are asking for more accurate climate-risk disclosures, and how climate risks can impact investors. Georgiev said investors need accurate and comparable information to make informed investments. He added that the rule will help investors save on their research costs.

Garcia said she was baffled by the notion that the SEC doesn’t have sufficient authority to make this rule, noting that she is a former lawyer and judge. She asked if Georgiev thought there was sufficient legal authority for this rule. Georgiev agreed that there was.

Maxine Waters (D-Calif.), Ranking Member of the Full Committee, asked Georgiev to summarize why the SEC has the legal authority to require public companies to disclose their climate risks and emissions metrics. Georgiev explained that the SEC has made disclosure requirements for decades and has broad authority to regulate disclosures. Waters asked if there was a need for legislation to clear up the confusion and make the SEC feel more comfortable with its authority. Georgiev said that wasn’t necessary.

Rep. Rashida Tlaib (D-Mich.) noted that in Schedule A of Section VII of the Securities Act of 1933, Congress gave the SEC the authority to regulate disclosures for 32 categories of information. She asked Georgiev if Schedule A was ever amended or repealed, and he said no.

Tlaib confirmed that the SEC has required environmental disclosures since the Nixon Administration, and asked Georgiev to discuss the history and breadth of the SEC’s disclosure requirements. Georgiev said the SEC has expanded and decreased disclosures over the years in response to the market and has the ability to require disclosures in areas beyond what is explicitly stated in the law.

Tlaib asked if any court ever invalidated an SEC rule because it oversteps the agency’s authority. Georgiev said no, and that he doesn’t think any court should do so with this rule. Tlaib said companies should not be allowed to obscure their climate risks and threaten the investments of retirees and workers.

Tlaib also noted that California and the EU adopted stricter climate risk disclosure rules that many companies will already have to comply with and asked how the SEC rule would impact net compliance costs. Georgiev said that for the approximately 32,000 American companies that will have to comply with EU disclosure rules, the added marginal cost of complying with SEC disclosure will be minimal.

Rep. Juan Vargas (D-Calif.) said he agreed with the SEC and believed that the rule is within their jurisdiction. He added that the disclosure information is material for investors.

Rep. Sean Casten (D-Ill.) said the U.S. needs clear, transparent climate risk disclosures, noting that insurance companies are pulling out of areas like Florida with high climate risks and passing those risks along to the companies and communities who stay.

Casten explained that the Supreme Court said in Basic Inc. v Levinson that information is material if a reasonable shareholder would consider it important. He asked if there was any debate that a reasonable investor would see these hundreds of millions of dollars in disruption as important. Georgiev confirmed that a reasonable investor would find that significant. Casten responded that the hearing is about whether the government is going to protect investors’ right to access information or protect companies’ right to withhold information from investors.

Rep. Steven Horsford (D-Nev.) noted climate disclosure policies are driven by customer demands and said that more informed investors are a good thing. He also affirmed that the SEC has the authority to make this rule.

Horsford asked why some companies are choosing to voluntarily disclose climate information, and what benefits that would have for those companies. Georgiev explained that voluntary disclosure allows companies to distinguish themselves from their competitors. He added that companies are reluctant to disclose negative information to investors, which is why we need mandatory disclosures.

Horsford concluded that under the SEC’s proposed rule, companies would have to disclose their climate risk and outline their climate risk management processes, which constitutes good business governance.

Green clarified that proposed rule is still in its infancy and is still being changed. He cited Chair Gensler’s comments in a previous hearing that it is not the SEC’s intent to have farmers report on what they sell to publicly traded companies.

Republican Concerns & Criticism

Rep. John Rose (R-Tenn.) said he was extremely concerned about the proposed rule’s implications and the impacts it would have on the economy and the agricultural industry. He discussed a letter he led in May to Chair Gensler with 117 other members of Congress, which detailed the negative impacts the rule would have on the agricultural sector. Rose said the fact that the SEC is still pursuing the rule is demonstrable of the lack of understanding that unelected Washington bureaucrats have for the work farmers do.

Rose asked Schultz how the SEC’s one-size-fits-all approach would impact family businesses like his farm. Schultz said there’s potential for the consequences to go beyond the rule’s intent and harm small businesses.

Rose asked about the potential impacts of the SEC requiring disclosures of immaterial things. Crain said immaterial disclosures increase costs, while material disclosures are the ones that matter and impact investors. Rose asked whether companies are already required to disclose every piece of material information. Crain confirmed that they are.

Rep. Frank Lucas (R-Okla.) lamented that instead of conducting a cost-benefit analysis, the SEC relies on international standards like those of the Financial Stability Board’s Task Force on Climate-Related Disclosures. Lucas asked about the risks of us relying on international standards for our domestic markets. Cunningham said there is no evidence that the US securities markets are mispricing stocks and causing capital misallocation. He added that the SEC should focus on our own markets.

Rep. Warren Davidson (R-Ohio) criticized the SEC for being hyper-aggressive with its regulation and said he would like to restructure the SEC and effectively eliminate the Chair position. Davidson cited West Virginia v EPA as proof the SEC doesn’t have the authority to propose the climate rule.

Davidson said the rule would result in small businesses being consolidated, offshored, or put out of business. He asked how Biden v Nebraska wouldimpact the SEC’s argument for the climate disclosure rule, even if Scope 3 was stripped from the final rule. Cunningham pointed to West Virginia v EPA and Biden v Nebraska as evidence that the Supreme Court is being careful not to allow administrative agencies to overstep their authority.

Huizenga said public disclosure of farmers’ personal information is a substantial and unnecessary violation of privacy. He emphasized that it’s often the unintended consequences of a policy that are the hardest to handle and address.

SEC’s Proposed Share Repurchase Disclosure Modernization Rule

Rep. Ann Wagner noted the courts overturned the SEC’s stock buyback disclosure rule because it failed to respond to public comments and failed to complete a proper cost-benefit analysis. She asked if the SEC’s climate disclosure rule has the same deficiencies as the SEC’s stock buyback disclosure rule.

Crain said there are strong parallels between the two rules, noting that neither included a robust cost-benefit analysis.

Wagner noted the courts gave the SEC the opportunity to fix the stock buyback disclosure rule, but they failed to do so. She asked if that failure was indicative of deeper problems in the SEC’s rulemaking process. Cunningham agreed that it could be.

Wagner lamented that the APA is not being followed, noting that in the stock buyback case, the SEC failed to identify the issue they were trying to correct. She asked about the duty an agency has to demonstrate the issue they are trying to correct. Cunningham explained that an agency has to demonstrate a substantial basis for its rule.

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