Political pressure is mounting on the Securities and Exchange Commission (SEC) over its efforts on climate reporting and Environmental, Social, and Governance (ESG). With the recent delay in final regulations, the question arises: Is the SEC bowing to pressure from critics?
Garry Gensler, chairman of the SEC and tireless advocate for stricter ESG regulation in the US listed market, appears to be yielding ground.
Last week, the SEC postponed the publication of the final version of climate reporting rules for the third time. In November, the commission already removed all references to ESG from the "2024 Examination Priorities" for investment advisers and other financial services firms.
The commission aims to require listed companies to disclose information on their climate impact, such as carbon emission figures, in financial statements.
However, the SEC is encountering increasing criticism from US business and politics against expanding those rules. A House member earlier this year described this as the "weaponisation" of the SEC.
Debate over scope 3
The primary contention surrounds Scope 3, or supply chain reporting. The SEC's ability to impose Scope 3 requirements is questionable, given its limited supervisory power over listed companies.
"Forcing these listed companies to report Scope 3, which will likely require private companies to provide reports to the listed companies, is an overstepping of the SEC's authority," said Jonathan McGowan, a lawyer and ESG columnist at Forbes.
"Democratic members of Congress are demanding Scope 3, so there is pressure to find a solution," McGowan added.
However, organisations such as the US Chamber of Commerce and West Virginia Attorney General Patrick Morrisey are voicing concerns. Democratic senators Jon Tester of Montana and Joe Manchin of West Virginia have also expressed reservations. Legal action is threatened if the SEC implements stricter rules.
Gensler's ambiguity
Despite delaying a final legislative framework until likely April 2024, Gensler has declined to provide clarity on any change in plans. He has acknowledged hearing the complaints of opponents "loud and clear".
Asked if April 2024 is a feasible timeline, Gensler quipped, "My eldest daughter's birthday is in April," as reported by Bloomberg Law.
"Cydney Posner, a lawyer at Cooley LLP and an expert in SEC reporting and compliance, suggests, "The delay might be due to the SEC bracing for legal and political challenges regarding the controversial climate proposal. They might still be reviewing the 16,000 comment letters."
Facing ‘burnout’
It's unclear whether the SEC's slowing down on sustainability signals a diminished priority for ESG.
"In my opinion, business pressure hasn't deterred the SEC's ESG ambitions, but it has induced more caution and likely 'burnout' from the threat of numerous lawsuits," Donald Langevoort, a law professor at Georgetown University and former SEC lawyer, told Investment Officer.
McGowan also doubts that legal challenges will deter the SEC's commitment to mandatory climate-related reporting but suggests it will prompt "extra diligence".
Countdown to change
The timeline for implementing the final rules is crucial, according to McGowan. Reporting standards only take effect a year after publication in the Federal Register. If adopted in 2023, the rules would be active by 2025. A delay until early 2024 would push this to 2026.
With a potential change of power in US politics, and thus the SEC, less than eighteen months away, the commission is reportedly gearing up for new rules in the coming months, Bloomberg notes.
"Gary Gensler has indicated a desire to give companies ample preparation time, suggesting the final rules may already be complete but withheld until early 2024," McGowan remarked.
