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SEC Steps in on ESG Disclosure Rules

In the US, mandating disclosure of companies’ compliance with environmental, social and corporate governance (ESG) standards appeared to be the lone area of financial services regulation that might see action in 2022. At the end of 2021, it also seemed likely that regulatory action would only come from the Securities and Exchange Commission (SEC) rather than Congress. On March 21, the SEC stepped forward with a proposal regarding ESG disclosure rules.

As it has been dubbed for now, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” or, informally, mandatory climate risk disclosures, is expected to be finalized later on in 2022. The proposed rules will have a 30 to 60-day comment period. A timetable for phasing in the rules has not yet been issued.

“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions,” SEC Chair Gary Gensler writes in his statement. “Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand… [as well as] provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.”

Scopes for ESG Disclosure Rules

The proposal defines three scopes for disclosure. Scope 1 requires disclosure of direct greenhouse gas emissions. Scope 2 requires disclosure of indirect emissions from electricity or other forms of energy that a company buys. Scope 3 requires disclosure of greenhouse gas emissions from activities both upstream and downstream from a company’s value chain.

However, language in the proposal couches enforcement of Scope 3 disclosures by including it in the legal safe harbor covering forward-looking statements by corporate officers, which was affirmed by a US federal court in February 2021. The safe harbor means companies cannot be held liable for projections that do not happen as expected.

In addition, companies would be allowed a later start on disclosing Scope 3 emissions and impacts.

The Investment Company Institute, which represents institutional investors globally, praised the proposal, saying it will provide investors with “comparable, consistent, qualitative, and quantitative information.” Generally, investors have a considerable interest in getting accurate ESG compliance information, since in the US alone, ESG funds attracted $69 billion in new capital during 2021.

Opposing viewpoints

Opposition to the SEC’s new proposed ESG disclosure rules has come from commissioner Hester Peirce, the lone Republican on the commission, who says the proposal is outside the SEC’s expertise. Sen. Patrick Toomey, the ranking Republican on the Senate Banking Committee also said the proposal is outside the SEC’s mission. The US Chamber of Commerce challenged the proposal on the basis that it requires disclosure of information that is “immaterial.”

Sen. Toomey stated that action on ESG compliance should come from legislation rather than SEC regulation. The ESG Disclosure Simplification Act of 2021, part of House Resolution 1187, the Corporate Governance Improvement and Investor Protection Act, narrowly passed in the US House in June 2021 but has not yet been voted on in the US Senate. Related legislation also remains stalled, with H.R. 2570, the Climate Risk Disclosure Act of 2021, placed on the US House calendar in May 2021 and not addressed since then. In September 2021, the Senate held hearings on its version of that legislation, S.1217, introduced by Sen. Elizabeth Warren, but that bill has also not seen any other action since then.

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