House Committee on Financial Services Subcommittee on Oversight & Investigations: Victims of Regulatory Overreach: How the SEC’s Climate Disclosure Role Will Harm Americans
House Committee on Financial Services
Subcommittee on Oversight & Investigations
Victims of Regulatory Overreach: How the SEC’s Climate Disclosure Role Will Harm Americans
Monday, March 18, 2024
Topline
- Republicans raised concerns about the SEC’s Climate Disclosure Rule on public companies, pension plans, retail investors, and small businesses. Members specifically cited increased compliance costs and confusion in the markets as concerns.
Witnesses
- Whitney Hermandorfer, Director of Strategic Litigation Unit, Office of Tennessee Attorney General
- Renea Jones, Co-Owner, Jones & Church Farms, Inc.
- Alex Scott, Associate Professor of Supply Chain Management, University of Tennessee, Knoxville
Opening Statements
Subcommittee Chair Bill Huizenga (R-Mich.)
In his opening statement, Huizenga said that to appease the left, Chair Gensler of the SEC proposed a nearly 500-page climate disclosure rule which by the SEC’s own estimate would cost companies billions of dollars to comply with. He said that Chair Gensler ignored the warnings from the Supreme Court which ruled in West Virginia v. EPA that the EPA had exceeded its statutory authority by relying on ambiguity as constituting an implicit delegation from Congress and from the Fifth Circuit which ruled against the SEC’s share repurchase disclosure rule. Huizenga warned that the SEC was enacting too many rules too quickly and that that has been a common theme throughout Chair Gensler’s tenure at the SEC. He criticized the SEC for providing the Financial Services Committee with unresponsive documents and very few answers when pressed on the climate disclosure rule, speculating that Chair Gensler did not want Congress to see the flimsy basis on which the SEC’s climate rule was crafted. Huizenga explained how the SEC’s climate disclosure rule undermines the Commission’s existing materiality standard which requires companies to disclose information to investors and shareholders so that they can make informed investment decisions. He said that the SEC should not redefine its materiality standard to prescribe climate related disclosures for all public companies even when a reasonable investor would not find such information important to their investment and voting decisions. He concluded that the SEC has strayed far from its mission and warned that the Commission’s overreach would significantly hurt the economy while serving as a boon for special interest groups and far left activists.
Representative John Rose (R-Tenn.)
In his opening statement, Rose said in his view, the SEC’s climate rule will have devastating impacts on businesses and families across America. He said that forcing the SEC to remove the Scope 3 provisions of the proposed climate rule was a victory for farmers across the country.
Representative Andy Ogles (R-Tenn.)
In his opening statement, Ogles said the SEC’s climate rule bullies companies into reporting environmental information that has no relevance to the financial concerns that matter to investors. He described the SEC’s proposal of the climate disclosure rule as an unprecedented power grab, and said he looked forward to nullifying the rule alongside his colleagues.
Testimony
Whitney Hermandorfer, Director of Strategic Litigation Unit, Office of Tennessee Attorney General
In her testimony, Hermandorfer described the SEC’s climate rule as misguided and legally flawed before explaining how it inflicts real harm on Tennesseans. She noted the Commission’s flawed process hampered the ability of commenters to vet the agency’s proposal. Hermandorfer said the SEC’s rule is not an isolated overstep in the field of business and climate regulation, citing the 75 percent increase in major climate rules under the Biden Administration. She said that these rules undermine the efforts of pro-consumer and pro-growth states. Hermandorfer discussed how the SEC and other agencies can stymie or even nullify state level policy choices by enshrining burdensome rules. She noted that Tennessee filed a first of its kind consumer protection lawsuit against BlackRock for its flawed ESG policies and said that after that, BlackRock announced it was stepping back form the Climate Action 100+ group that promotes a net carbon neutral agenda. Hermandorfer said the climate agenda and the fiduciary duty to increase shareholder value often conflict and concluded that it’s troubling that the SEC’s final rule relied on policies that investors have walked back.
Renea Jones, Co-Owner, Jones & Church Farms, Inc.
In her testimony, Jones explained that her farm would have been forced to hire an attorney and a chemist to comply with Scope 3 reporting requirements. She noted that the number of regulations has increased threefold over the past 10 years and urged the SEC to stay focused on Wall Street instead of American farms. Jones concluded that California should not be able to dictate what happens on any farm outside their state, and neither should the SEC.
Alex Scott, Associate Professor of Supply Chain Management, University of Tennessee, Knoxville
In his testimony, Professor Scott discussed how climate reporting imposes significant costs on businesses, including measuring and monitoring systems that do not currently exist. He noted that even leading emissions organizations struggle to generate default values on an industry wide basis, and cited competing standards and the lack of clear guidance on the exact procedures that companies should follow when reporting emissions. Scott explained that while the SEC requires companies to report Scope 1 and 2 emissions, Scope 3 emissions are not required to be reported and can account for as much as 80-90 percent of emissions in the supply chain of a product which would encourage firms to outsource their operations to reduce their Scope 1 and 2 emissions. He noted that the SEC’s climate rule will likely not decrease emissions and instead shift emissions into places that are more difficult to observe or measure and to areas that are shielded from reporting requirements. Scott concluded by saying that this rule will influence the decision of a firm choosing to go public or remain private, as these reporting requirements and their associated costs could make staying private more attractive to a number of firms.
Question & Answer
SEC Authority
Huizenga asked whether the SEC has the authority to require the disclosure of climate related information either through the Securities Act or the Exchange Act. Hermandorfer noted the SEC’s consistent position over the past 50 years has been that it does not have the power to mandate across the board climate or other social issue disclosures. She explained that the SEC cites language saying it has the power to require certain disclosures in the context of registration statements and language saying it has the power to mandate disclosures that are appropriate for the protection of investors.
Huizenga asked if the SEC had proved that the changes to the materiality standard won’t be harmful to investors. Hermandorfer said no, and explained how the changes would harm investors by flooding them with information irrelevant to the value of a company. She said that investors wouldn’t be able to decide which information is material to their investment and which is irrelevant.
Ogles asked if this rule violated the first amendment by requiring firms to publish data that is not intrinsically linked to their financial performance. Hermandorfer responded saying that to justify compelling climate disclosures, the government would have to prove that these disclosures are materially advancing a substantial government interest in a way that is no broader than necessary when it comes to burdens. She said the rule fails any number of those requirements and that because there is no reliable data, it is not a plausible argument for the SEC to say disclosure of the climate data will meaningfully help investors.
Rep. Andy Barr (R-Ky.) asked Hermandorfer to elaborate on the lack of statutory authority that the SEC has disavowed. She noted that in 1975, the SEC concluded it did not have the statutory authority to mandate across the board social issue disclosures.
Rule’s Negative Impacts on Businesses & Shareholders
Huizenga said that he is concerned that the rule is intentionally vague to allow a left leaning activist group to sue companies and depending on which court system they sue in, force change in those firms through the courts. Scott said that there are ongoing lawsuits over carbon neutrality claims and that he believes this rule does open up the possibility of lawsuits and that that is probably one of the strategies behind the rule.
Huizenga asked if the rule would help promote companies going public. Scott said it would discourage companies from going public by increasing the costs of going public and increasing the benefits of staying private and so that will naturally shift the decision to go public for some firms.
Barr asked whether the rule’s competing standards would enhance the ability of public companies to deliver on corporate earnings or if it would force public companies to divert resources towards compliance and litigation. Scott said the rule would divert resources from financial performance to compliance costs. Barr asked if this would detract from a company’s ability to deliver on returns to the shareholders. Hermandorfer explained that anytime you are diverting from innovation and cost cutting, it detracts from considerations around driving shareholder value.
Barr asked if the rule’s uncertainty would result in overreporting or underreporting. Hermandorfer said overreporting, explaining that companies would need to determine whether information is likely to be material in the future. Barr asked if overreporting is conducive to maximizing investor returns, or if overreporting is likely to result in lower returns for investors. Hermandorfer said overreporting would decrease shareholder value without any added benefit to investors.
Barr asked whether the final rule would alter public institutions’ willingness and ability to do business with traditional companies in the US, like the energy and freight trucking industries. He asked Scott to clarify whether the rule was intended to disclose financial risk or if it was meant to create financial risk for the politically unfashionable energy businesses. Scott explained the rule would impact energy producers the most, while also changing the calculus of whether companies do things with their own assets, or whether they use offshore third parties to reduce their emissions on paper.
Barr asked if the final rule would enhance the consistency, comparability, and reliability of disclosures or merely increase confusion in the markets. Hermandorfer said the rule would increase confusion without any intended benefit.
Rule’s Negative Impacts on Retail Investors, Retirees, and Small Businesses
Huizenga asked Jones about the proposed rule’s impact on her business. Jones said she would not be confident handling the additional compliance burden of the rule with her limited knowledge of greenhouse gases. Huizenga followed up by saying that while Scope 3 emissions were not included in this final rule, statements from Commissioners and Chair Gensler imply that they could be required down the line. Jones said Scope 3 would make it hard for many or all small farms to survive.
Rose asked if the SEC reached out to Tennessee to discuss the state’s obligations to pensioners, and how the climate disclosure rule would impact the performance of companies that have pension plans in Tennessee. Hermandorfer said she was not included in any of those discussions, and noted the SEC is allowing BlackRock and other climate groups who don’t reflect what the normal investor cares about to dictate policy.
Rose asked if risk-averse companies would cut small businesses out of their supply chain if small businesses failed to provide data required by the rule. Scott said yes, explaining that larger companies would have better reporting capabilities and could ignore small companies that cannot report their emissions.
Rose asked if the rule would positively contribute to the productivity of the U.S. and the reduction of American reliance on foreign suppliers. Scott said the rule encourages outsourcing to reduce emissions as an accounting trick. Hermandorfer said the rule would hurt Tennesseans and investors across the country who have different values than ESG investors on Wall Street. Jones added that it would cost the country more money to implement the rule and manage all of data.
Ogles asked if the rule would result in increased costs, hurt Jones’ profitability, and lead to a scenario where small farms are forced out of business. Jones agreed that it would and explained that while her farm has fought through regulations, this rule would force them to reevaluate.
Scope III Emissions and Emissions Data
Rose noted that despite its elimination from the final rule, he was concerned that parts of Scope 3 were backdoored into the rule. Scott agreed with his concerns.
Ogles asked if the information being provided by these firms regarding emissions was reliable. Scott said that there aren’t clear guidelines for companies collecting data and that getting accurate data to protect them from lawsuits down the line is difficult. Ogles asked if there was a set standard by which large and small companies could collect emissions data. Scott said there is nothing that is extremely straightforward and that there is no clear roadmap for firms to follow.
Rep. Mike Flood (R-Nebr.) asked if the SEC could use the rule’s disclosures to argue that Scope 3 disclosures are material. Hermandorfer explained that the final rule establishes a presumption of materiality to anything that is elevated to the board level and so you could have a situation where the board of a firm is having climate risk related discussions on issues not material to the company, but under the final rule there would be a burden put on the company to prove those issues were not material.
Huizenga asked the witnesses to define one thing members should take away from the hearing. Hermandorfer urged members to keep up the pressure and not to be fooled by the Scope 3 withdrawal, emphasizing the burden of the final rule.
For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.