On January 18, the House Financial Services Subcommittee on Oversight and Investigations held a hearing entitled “Oversight of the Securities and Exchange Commission’s (SEC) Proposed Climate Disclosure Rule: A Future of Legal Hurdles.” Witnesses in the hearing were:
- Mr. Charles Crain, Vice President, Domestic Policy, National Association of Manufacturers
- Mr. Lawrence Cunningham, Special Counsel, Mayer Brown
- Mr. Bill Schultz, Vice President, Schultz Fruitridge Farms, Inc.
- Mr. George Georgiev, Associate Professor of Law, Emory University School of Law
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Last week’s hearing focused on the implementation of SEC’s Climate Risk-Related Disclosure Proposal. Topics of discussion centered around the SEC’s legal authority to implement the proposal as well as potential unintended downstream consequences of the proposal.
- Republican Members focused most questions on the SEC’s legal authority to impose such a rule regarding climate change. They said that recent judicial rulings like West Virginia v. EPA and the 5thCircuit Court decision on the SEC’s stock-buy-back rule serve as grounds to refute the SEC’s claimed jurisdiction in the climate regulatory space. In addition, Republicans addressed concerns with the compliance costs of the proposal, saying that Scope Three emission disclosure requirements will create unintended downstream effects as cost will be passed onto farmers and consumers.
- Democrat Members said this proposal is crucial to ensure investment analysis is comparable across markets and will ultimately benefit the robustness of American markets. They made the point that the SEC is not seeking to regulate climate change, but rather ensuring investors have necessary information to make sound investments.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman Bill Huizenga (R-MI)
- The SEC has wildly underestimated the cost of the Climate Disclosure proposal for both private and public companies. While the SEC estimated that the reporting requirements would cost companies $10 billion dollars a year, a recent study puts that number closer to $25 billion dollars a year. There is little analysis how Scope Two and Scope Three requirements will impact small businesses who cannot afford high compliance cost like this.
Subcommittee Ranking Member Al Green (D-TX)
- The SEC is giving clarify to public companies regarding climate risk. Regional weather patterns can affect a company’s operating performance and there an overwhelming public demand for this information. There is no need to walk back this proposal as Republicans have encouraged in the past.
Mr. Charles Crain, Vice President, Domestic Policy, National Association of Manufacturers
- The SEC’s proposed climate disclosure rule is a significant part of its recent regulatory onslaught. If finalized, the rule would dramatically increase manufacturers’ compliance costs, divert resources from job creation and growth, expose companies to increased liability, reveal proprietary and confidential information, and ensnare wide swaths of the manufacturing supply chain.
Mr. Lawrence Cunningham, Special Counsel, Mayer Brown
- The SEC’s proposal does not explain why climate risk information warrants compelled disclosure, rather than relying on voluntary disclosure, compared to information about all the other risks a company faces.
- In West Virginia v. EPA, the Court held that the EPA lacks authority under the Clean Air Act to limit greenhouse gas emissions from power plants. The proposal is vulnerable to legal challenge under the major questions doctrine, as outlined by the Supreme Court in a pivotal opinion handed down during the quarter after the proposal was released.
Mr. Bill Schultz, Vice President, Schultz Fruitridge Farms, Inc.
- I believe the burdens of this proposal would cause hardships for many small and medium-sized farms. Consumers are already facing higher food prices at the grocery store and this proposed rule would only exacerbate price increases. The proposed rule has the potential to require very detailed information from each farm, which will ultimately create barriers to entry and increase costs.
Mr. George Georgiev, Associate Professor of Law, Emory University School of Law
- Because climate-related disclosure will help ensure securities price accuracy and market efficiency, the proposal will benefit both retail and individual investors and larger institutional investors, regardless of their interest in or stance on climate change. The SEC is considering the wide range of views on costs and benefits carefully.
Discussion
SEC Authority
Waters (D-CA): How does the SEC have the legal authority to require public companies disclose their climate-related risk? Georgiev: The SEC’s legal authority stems back to the original statutes in the 1930s, and this is an authority that the SEC has exercised time and time again for nine decades. The SEC has continually engaged in the iterative improvement of the disclosure framework.
Garcia (D-TX): How can a company’s climate-related risk create risk for financial investors? Georgiev: This proposal is crucial to ensure investment analysis is comparable across markets. Furthermore, the proposal will save investors costs in their risk analysis research.
Garcia (D-TX): Does the SEC have legal authority to impose this rule? Georgiev: Yes, there is judicial analysis to suggest so and Congress has had multiple opportunities to restrict the SEC, which it has not done.
Wagner (R-MO): Does the SEC’s climate risk proposal have the same cost-benefit deficiencies as the stock buy-back rule that the 5th Circuit Court ruled was “arbitrary and capricious”? Crain: Yes. We are seeing very many parallels between the two as the SEC has failed to acknowledge the trickle-down effects of this proposal.
Wagner (R-MO): Does the 5th Circuit Court decision indicate failures within the SEC’s rulemaking process? Cunningham: Yes. The SEC does not even substantiate the existence of the problem this rule is addressing in the first place.
Rose (R-TN): Are public companies are already required to report every piece of material information, correct? Crain: That is correct.
Tlaib (D-MI): Over the course of nine years of rulemaking, has any court invalidated any SEC rule for exceeding its disclosure authority? Georgiev: No.
Tlaib (D-MI): What impact will this rule have on net compliance costs? Georgiev: The SEC is not required to compare costs and benefits and conclude that there is a net benefit. Congress has not determined that this is something that the SEC needs to do. The marginal cost of SEC climate-disclosure compliance is likely to be zero or minimal.
Lucas (R-OK): How is the SEC different than international standard setters and what are the risks of the SEC using international standards to assert jurisdiction over climate-related disclosures? Cunningham: There is no evidence that U.S. securities markets are mispricing stock that leads to misallocation. It would concern me if the SEC chose to focus on global markets instead of American markets, which are more efficient.
Vargas (R-CA): How is the SEC engaging with industry stakeholders in this rulemaking process? Georgiev: The SEC has taken 372 meetings on the climate disclosure rule, in the past 22 months. The SEC is very interested in hearing feedback about the rule and calibrating it appropriately.
Davidson (R-NC): What is the SEC’s legal authority in this space? Crain: The SEC has a very clear set of legal authorities to require disclosure of material information for the protection of investors, efficient markets, and capital formation. This rule does not meet those requirements.
Davidson (R-NC): How could Biden v. Nebraska impact the SEC’s argument in favor of the climate disclosure rule? Cunningham: This case and other case opinions indicate that the Supreme Court is going to be careful not to allow administrative agencies to exceed their grant of Congressional authority.
Huizenga (R-MI): Has the SEC ever given weight to a non-investor constituency? Cunningham: In this proposal, the SEC went to great lengths to talk about investor demand, which is a novel concept as a way to support its invoking its authority under investor protection. Yet, the investor demand that it attempted to measure was just one segment, and it paid no attention to the 160 million individual investors who really need the SEC protection.
Huizenga (R-MI): Do you think courts will overturn the activist rulemakings of the SEC? Cunningham: We have identified several deficiencies in the proposed rule and, if enacted as is, it will be in jeopardy.
Horsford (D-NV): What role do voluntary disclosures play in comparison to mandatory disclosures? Georgiev: It is important to have a baseline standard so companies cannot pick and choose which information to disclose.
Green (D-TX): Can you comment on the SEC’s intentions with this rulemaking? Georgiev: The SEC is not seeking to regulate climate change, but rather ensuring investors have necessary information to make sound investments.
Green (D-TX): Why should the SEC regulate investor markets over the EPA? Georgiev: All agencies of the federal government must make allowances for climate change. The SEC’s proposed rule will benefit investors.
Impact on Agriculture
Sessions (R-TX): What are some implications of having to comply with the proposal’s regulations for farmers? Schultz: The SEC does not usually get involved in farm operations, and this proposal will send ripples across the industry as it adds a layer of cost.
Rose (R-TN): How will this proposal impact farmers in your community? Schultz: There is potential for this proposal to get carried beyond from its initial intention, especially if the Scope Three requirements that are in the proposed rule went into effect today.
Lucas (R-OK): What are the real compliance costs for this proposal? Schultz: As a farmer, this will be a costly endeavor, and we will have to hire additional staff.
Lucas (R-OK): How do voluntary disclosure frameworks differ from the SEC’s proposed climate rule? Crain: Many companies are participating in voluntary disclosure frameworks, while the SEC is proposing a compliance burden that could trickle down to private groups.
Vargas (R-CA): How has climate change disclosure impacted your farming? Schultz: We need clarity on Scope Three disclosures, as it seems like it will impact the entire supply chain and American farmers.