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SEC Reporting Rules Are Year’s Biggest Climate Finance Hurdle

Nov. 23, 2022, 9:00 AM

Now that COP27 in Egypt is over and the US midterm elections yielded a divided Congress, the next major event in the climate finance world will be the Securities and Exchange Commission’s new rules on climate reporting for public companies. One clue as to what the rules will look like may have just come from the Biden administration.

Bankers and regulators don’t expect SEC Chair Gary Gensler to release the new rules until early next year, after they were delayed indefinitely last month following an unprecedented comment period that drew more than 14,000 letters. The rules will almost immediately trigger litigation from companies, business groups, and Republican opposition, which will argue the agency is exceeding its authority to regulate Wall Street by trying to fight climate change.

“There are different interests at play here,” David Atkin, chief executive of the Principles for Responsible Investment in London, a UN-supported organization, told me. “We think directionally they’re heading toward the right place, though we think there is still some tweaking to be done.”

Scope 3 Emissions

Tweaking may be understating it. At the heart of the debate is a controversy over the inclusion of specific data about greenhouse gas emissions from a company’s supply chains, known as Scope 3 emissions. Scope 1 emissions, which are a company’s direct emissions, and Scope 2, which are emissions produced from the energy it uses, are much easier to tally than Scope 3, which for large companies could involve hundreds of suppliers.

Scope 3 emissions are typically the majority of any large company’s pollution footprint. Big companies such as HP, Ford Motor Co., and Unilever are already voluntarily working to reduce them, according to Ceres, a research network supporting sustainable capital markets. Many others argue it would be too hard to control the emissions of massive lists of suppliers and might even dilute the value of their climate reporting, especially if they are included in financial statements as the SEC proposed.

Rule for Federal Contractors

As the climate finance world awaits the new rules, a clue for investors on how Gensler and the SEC might react, or possibly even a blueprint for the SEC to take some of the heat off. This could come from the Biden administration’s recent rule requiring all federal contractors of a certain size to measure, report, and reduce emissions going forward. Biden announced the new rule on Nov. 10 while in Egypt for a three-hour stopover at COP27 in Sharm el-Sheikh.

With the federal government responsible for more than $630 billion in purchases in the past year, the Biden rule could be viewed as the largest Scope 3 effort of all time. Yet the government left a large portion of its contractors off the Scope 3 requirement, limiting it only to the massive suppliers with contracts greater than $50 million a year. Anything less would only require Scope 1 and 2 reporting, and small contracts under $7.5 million a year would require none.

The announcement followed successful efforts by Democrats to pass the Inflation Reduction Act this past summer, the most important climate legislation ever passed in the US, targeting more than $370 billion in spending on climate infrastructure and programs over the next decade.

White House Arsenal

Combined, the two efforts show Biden is all in on fighting climate change, even without a Democratic Congress.

Biden’s Scope 3 announcement could deflect expected heat on Gensler and the SEC and give them cover to also impose a limited requirement, which would target just the largest companies and reduce complaints about excessive financial and data reporting by smaller, less equipped companies.

A limited Scope 3 requirement, which would still cover the largest companies whose emissions investors might be most interested in, would have strong support from the investment community, which is generally in favor of more information on climate risk.

Preventing Negative Court Ruling

Depending on the timeframe for implementation, for example if it went out two years or so, such a move could also weaken legal attempts to overturn the entire set of rules instead of just that particular part by creating an extended buffer for the Scope 3 section.

The legal threat is Gensler’s chief concern following the US Supreme Court’s ruling in West Virginia v EPA on June 30. That ruling threw into question any regulatory agency’s ability to authorize major shifts in policy without congressional approval, something harder now for climate rules after the midterms shifted the balance of power.

Gensler and his commissioners face a delicate balance between wanting to set new rules with enough teeth to satisfy investors concerned about climate risks against the possibility that the entire new plan could be overturned in court. Such a move would set global climate reporting standards back years.

A limited Scope 3 plan such as the Biden team’s federal contractors rule may just be able to thread the needle.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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David Callaway is founder and editor-in-chief of Callaway Climate Insights. He is the former president of the World Editors Forum, editor-in-chief of USA Today and MarketWatch, and CEO of TheStreet Inc.