Will “weaponization” be Merriam-Webster’s word of the year? On Wednesday, SEC Chair Gary Gensler testified to the House Subcommittee on Financial Services and General Government on the topic of SEC appropriations.   The SEC is asking for a 12% increase.  Why? Gensler cited tremendous growth in the markets and the “wild west of crypto,” which, he said, without prejudging any one token or exchange, was “rife with non-compliance”; the SEC was stretched thin in its efforts to investigate, but “must be able to meet the match of bad actors.”  In response, Gensler heard from some subcommittee members about heavy-handed enforcement, the “blistering pace” of rulemaking (which distracts the SEC from the work some members perceived as its real mission), and capital formation treated as just an afterthought. There was certainly some time spent questioning the vast number of proposals the SEC was making (which Gensler reminded the member was fewer than proposed during Jay Clayton’s tenure) and some attention to staffing issues highlighted in the Inspector General’s report.  By far, however, the spotlight was on climate, with much of the subcommittee going on a tear—well, as much of a tear as possible in a five-minute allocation of time—about the SEC’s climate proposal. One member even went so far as to suggest that the climate proposal represented a “weaponization” of the SEC. What impact will these criticisms have on the proposal? (See this PubCo post.)

Although one subcommittee member viewed the climate proposal as important and urged Gensler to press on, that was distinctly at odds with the zeitgeist prevailing at the hearing.   Here’s a flavor of the questioning in the bullet points (based on my notes, so standard caveats apply):

• Members contended that the SEC is “sprinting” outside of its lane on the climate proposal and, mixing metaphors, it’s high time for the SEC to “reel it in.” What authority does the SEC have to address climate? At least three members reported that they had reviewed  the ’33 and ’34 Acts that were cited as authoritative and didn’t see a single mention of “climate” or “greenhouse gas emissions” or “social.” The SEC’s job is to execute the laws, not create them; the anti-deficiency laws prevent employees from using funds for activity that is unauthorized. One member observed that Congress took up a bill to authorize the SEC to mandate climate disclosure last year, but it didn’t pass the Senate—underlining the absence of authority.  Has the Chair heard of West Virginia v. EPA and the “major questions” doctrine??  (See this PubCo post.) This is unauthorized rulemaking—public opinion flows through Congress, which tells the SEC what the public thinks is important and what to do about it. The SEC is asking for more funding, but it has tasked employees to perform outside of their core functions.

Gensler response: When companies are offering securities, they must provide material information. Going back to the 1970s, the SEC has spoken about material risk and environmental disclosure. Lots of companies are already disclosing climate information; the SEC’s job is to bring consistency and comparability and prevent misleading disclosure.   The SEC is merit-neutral. In his view and that of counsel at the SEC, a requirement for climate disclosure is already authorized by the statutes adopted by Congress as interpreted by the courts. The SEC mandates disclosure about topics that investors consider material, and climate is now one of those topics, as indicated by the comments received.  

• One member suggested that the SEC’s climate proposal—especially a Scope 3 mandate—reflects a “true weaponization of the department” and hurts Iowa farmers. Another said that, even if farmers aren’t public companies and thus directly regulated, they still would be called upon to comply by customers as part of the supply chain, if the mandate for Scope 3 disclosure were adopted. Is the impact on small business part of the analysis?

Gensler response:  The SEC’s remit is public companies. There was no intent to ask for disclosure from private Iowa farmers. The SEC received over 15,000 comments—the most ever—including comments from 49 farm bureaus.  The staff is currently considering the comments.

• Scope 3 reporting will be expensive, and companies say they can’t afford it, especially small companies in the supply chain. Can commenters write in to the SEC and get the SEC to mandate whatever they want? If there are 10,000 investors writing in, what about the impact on the rest of the US population?  Can investors just impose a disclosure mandate on all these businesses?  Is that fair? If companies are already making disclosure, that’s their choice, but the SEC’s proposal goes beyond that. This proposal is about as unfriendly to business as the member had heard in a long time—why do we keep “sticking it to the businesses by piling on regulations”?

Gensler response: Investors, thinking about the value of their investments in various businesses, are concerned about climate risk.  The SEC’s job is to seek full, fair and truthful disclosure.

• Has the SEC considered the impact of the climate proposal on competition?  Some large companies may prefer these rules because they are better able to comply with them than smaller companies that have fewer financial resources available to comply?

Gensler response: Yes, the SEC considers the impact on competition and small business.

• One member noted that there was a big difference between mandating disclosure of internal metrics, such as executive comp and revenue, and external metrics like climate. Isn’t it apples and oranges?  There has long been values-based investing, but for the federal government to come in and identify the values on which it wants reporting is troubling.  A lot of green products are made with forced or child labor, he said.  Is the SEC planning to require reporting on that?

Gensler response:  Again, these are topics on which investors are demanding information. Investors want information about climate risk for purposes of their investment decisions.

• In its search for consistency through prescriptive regulation, is the SEC becoming judge and jury about which risks are important and which are not? Companies differ.

Gensler response: The SEC proposal would mandate some disclosure, such as GHG emissions, and in some cases, would require disclosure only if the company has taken certain actions, such as scenario planning.

• Aren’t there enough people already checking on GHG emissions?  Why do we want the SEC doing the same? How will the SEC verify that the disclosures are accurate and not misleading? Is the SEC “planning to hire a bunch of scientists”?

Gensler response:  That’s not the SEC’s role.  The SEC is dealing with disclosure of information that is material to investors. Lots of companies are already making disclosure and the SEC is trying to provide consistency and tamp down greenwashing. The SEC will perform the same function as with other disclosures.

• One member asked why the SEC is vetting the accuracy of disclosures made to satisfy the political agenda of some activist investors?  Looking at disclosure about a major environmental accident or EPA consent decree is one thing, but policy disclosure designed to meet social norms on a website is something else.  Why should the SEC expend valuable resources on that, instead of just preventing fraud? Can’t investors engage private entities to do that vetting? Isn’t that outside the SEC’s remit?

Gensler response: The SEC is not vetting anything.  Its role is to ensure that disclosure is not misleading and to require some additional information, such as financial statements and discussion of financial information—which is well-established—and other information that investors demand, such as climate disclosure—which is an emerging area. That helps protect the public and promote capital formation, which is part of the SEC’s remit. But the SEC is merit-neutral. 

• The markets don’t like uncertainty. Is the SEC concerned about the uncertainty that may arise out of the adoption of these transformational new rules and the legal challenges that will likely follow for years to come? What about the impact of the massive swings in policy at the SEC?

Gensler response:  He believes the work of the SEC will help the American public for many years to come.

• Does the SEC support the concept prevailing in Europe of double materiality? (See this PubCo post.)  What disclosures are some activists asking for that may not fit within the SEC’s materiality standard?

Gensler response: No, the SEC follows single materiality, i.e., what is material to an investor making an investment decision or voting, generally, the potential impact on revenue, profits, operations, suppliers, competition, worldwide regulation.

• Gensler has previously said that the regs around Scope 3 are not well developed.  Is the SEC going to eliminate Scope 3 disclosure from the proposal?  What does Gensler think personally?  “When are you going to have an answer on that [Scope 3]—yes or no?”

Gensler response: The SEC is working through the issue of Scope 3 disclosure. While there was consistent support for disclosure about Scopes 1 and 2, disclosure about Scope 3 was much more controversial. Even in the proposal, the SEC took a layered approach to Scope 3. It usually takes the SEC around 12 to 15 months from proposal to adoption, and the SEC has never had a comment file this big.  Gensler did not want to pre-judge—there are five commissioners who will make a decision.

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