SEC’s Gensler Sees ESG Plans Thwarted as Biden’s Term Nears End

SEC Chair Gary Gensler started out with big plans on ESG.

The Democrat arrived at the Securities and Exchange Commission in 2021, after George Floyd’s murder in 2020 and President Joe Biden’s election that year fueled interest in environmental, social and governance investing. Gensler wanted public companies to report details about their climate change risks, workforce management and board members’ diversity.

He also sought new rules to fight greenwashing and other misleading ESG claims by investment funds.

Almost four years later, most of those major ESG regulations are unfinished, and they’ll likely remain so in the less than five months Gensler may have left as chair. A conservative-led backlash against ESG and federal agency authority has fueled challenges in and out of court to corporate greenhouse gas emissions reporting rules and other SEC actions, helping blunt the commission’s power.

The climate rules—Gensler’s marquee ESG initiative—were watered down following intense industry pushback, then paused altogether after business groups, Republican attorneys general and others sued.

“It’s clear the commission leadership is exhausted and feeling buffeted by the courts, Congress and industry complaints,” said Tyler Gellasch, who was a counsel to former Democratic SEC Commissioner Kara Stein and is president and CEO of investor advocacy group Healthy Markets Association.

The SEC has finalized more than 40 rules since 2021, “making our capital markets more efficient, transparent, and resilient,” an agency spokesperson said in a statement to Bloomberg Law.

The spokesperson declined to comment on the status of the agency’s pending ESG rules, beyond pointing to the commission’s most recent regulatory agenda.

Long-standing plans to require human capital and board diversity disclosures from companies have yet to yield formal proposals. Final rules concerning ESG-focused funds still are pending, and even if the SEC adopts them before January as the agenda suggests, a Republican-controlled Congress and White House may have the power to quickly scrap them under the Congressional Review Act.

After a burst of activity proposing and adopting significant rules in 2022 and 2023, major rulemaking by the SEC has slowed in 2024, according to a Bloomberg Law review of agency records of open meetings, where votes to advance big regulatory matters usually happen. Gensler’s 2024 tally so far trails that of his two most recent predecessors: Trump appointee Jay Clayton and Obama pick Mary Jo White. Clayton picked up his pace of open meetings in his last year, while White held roughly steady.

Workforce Disclosures

Gensler’s SEC originally set an October 2021 target for proposing rules requiring companies to make specific disclosures about the demographic makeup of their workforces and the diversity of their boards.

But the estimated date of arrival grew later and later, and now the agency is looking to issue proposals on human capital disclosures—which could entail anything from how many part-time workers they have to employee diversity—in October.

The target for a board diversity reporting proposal has moved to April 2025, according to the agency’s latest agenda released in July.

The SEC usually takes at least a year to turn a proposal into a rule.

The agency has faced consistent calls from lawmakers and activists to speed up its workforce update so that investors can get access to more human capital data as soon as possible.

“I think the agenda has been incredibly ambitious and because of that, you’re resource-constrained,” said Ethan Rouen, an associate professor at Harvard Business School who specializes in human capital research. The SEC had to juggle “things that are winnable with things that are important. And human capital, while important, might be much harder to win,” he said.

Board Diversity

The odds of winning board diversity disclosure requirements also are questionable.

The SEC was sued in 2021 by conservative groups for approving Nasdaq Inc. rules that require thousands of companies listed on the exchange to report director diversity information annually and have a diverse board or explain why they can’t. The agency needed to approve the regulations for Nasdaq to implement them.

A panel of three US Court of Appeals for the Fifth Circuit judges appointed by Democratic presidents backed the agency last year, allowing Nasdaq’s rules to stand. Conservative groups appealed, and the full Fifth Circuit, where judges appointed by Republican presidents hold the majority, is expected to rule in the coming months.

“The argument is easier to make that the exchanges have that authority than the SEC,” Gellasch said. “So, if the exchanges lose that argument, it’s more challenging for the SEC to try to do it directly.”

ESG Funds

Unlike the workforce and board diversity rules that have yet to be proposed, investment fund regulations concerning ESG have already been drafted and are targeted for completion in October, according to the SEC’s latest agenda. ESG funds would have to disclose their portfolio companies’ emissions and report on their ESG strategies.

The SEC proposed the regulations in May 2022, along with rules intended to ensure ESG funds’ names align with their investments. The commission issued final fund name rules in September 2023.

The SEC’s investment fund proposal has raised objections from both funds and environmental and investor advocates.

The proposal would require environmentally-focused funds to disclose their carbon footprints, if emissions are part of their investment strategies. But it wouldn’t require funds that look at emissions to disclose other metrics that play a significant role in how they invest and the methodology they use to calculate those measures. The Natural Resources Defense Council, Interfaith Center on Corporate Responsibility, and other environmental and investor groups pushed for those requirements in an April letter to the SEC.

The Investment Company Institute, which represents funds, has raised concerns its members would have to report on their carbon footprints before public companies must disclose their emissions under SEC rules. The group in April called on the SEC to keep fund emissions reporting requirements on ice until the litigation challenging the agency’s public company climate rules is resolved. That litigation is at the US Court of Appeals for the Eighth Circuit, which is unlikely to rule this year.

The fund rules have received no Republican support at the SEC, with only Gensler and his fellow Democratic commissioners voting in favor of proposing them.

“If it’s a Republican Congress and Trump administration, you could imagine they would be willing to disapprove those,” said Susan Dudley, a George Washington University professor who oversaw the White House regulatory policy office under President George W. Bush.

Legal Woes

The SEC also may have to contend with another lawsuit, if it issues the investment fund rules in the next five months.

Republican attorneys general from West Virginia, Louisiana and other states urged the SEC in 2022 to abandon its proposed fund regulations after they pressed the agency to ditch its climate rules for public companies. When the agency proceeded with the climate regulation, adopting a diluted version in March, every state with a Republican attorney general—27 in total—either sued or sent the Eighth Circuit a friend-of-the-court brief in support of the litigation.

The SEC has lost major legal challenges to its authority under Gensler. Recent setbacks include the Fifth Circuit’s National Association of Private Fund Managers v. SEC ruling that struck down hedge fund fee disclosures in June and the Supreme Court’s SEC v. Jarkesy decision that month that curtailed the agency’s enforcement power. The SEC didn’t ask the Supreme Court to review the Fifth Circuit ruling ahead of a deadline last week, ending its fight to save the hedge fund regulations.

It’s unclear what regulations are possible after the court losses, said Alexandra Thornton, a senior director of financial regulation at the Center for American Progress, a left-leaning think tank. But the SEC isn’t done with ESG disclosure regulations for good, even if Gensler can’t overcome industry pushback and legal attacks in what could be the twilight of his chairmanship, Thornton said. Investors want the information, she said.

“Depending on what happens in the election, it may not be next year,” Thornton said. “But they’ll come back.”