US: SEC climate agenda stalls

As published on: investmentnews.com, Wednesday 3 January, 2024. 

The lack of progress is worrying environmental activists given the approach of the US presidential election, which could scuttle the regulator's ESG efforts.

The Securities and Exchange Commission’s failure to complete an ambitious climate-related agenda in 2023 is making environmental activists nervous.

Less than a year before a U.S. presidential election that could scuttle the regulator’s environmental, social and governance efforts, the SEC has yet to finish a mandate for public companies to disclose their environmental footprints. In addition, the agency’s specialized ESG enforcement task force has brought few climate cases since it was created in 2021.

During the Biden administration, the SEC has led the charge in calling for more financial regulation and disclosures tied to ESG issues. But pressure on Chair Gary Gensler has been building as the agency’s efforts become a political lightning rod.

Progressive advocates say the SEC should use securities regulations to tackle a range of social and climate issues, arguing that they are important to investors. But conservatives and business groups criticize such moves as overreach and have indicated they may sue to thwart them.

“There’s still a lot of unfinished business to get over the finish line as quickly as possible,” said Ben Cushing, director of the Sierra Club’s Fossil-Free Finance Campaign.

The most controversial part of the SEC’s agenda is a March 2022 proposal that would force businesses — in registration statements, annual reports or other documents — to detail risks that a warming planet poses to their operations. Under the plan, some large companies would also have to disclose emissions that come from other firms in their supply chain.

The SEC declined to comment.

Republicans, including two of the commission’s five members, have attacked the proposal, which was floated with only Democratic support.

Opponents have threatened lawsuits and congressional subpoenas, and have written thousands of comment letters against it. Some of their sharpest criticism has been aimed at a requirement to disclose so-called Scope 3 emissions — a broad term that essentially refers to pollution from other businesses in a company’s supply chain and from consumption of the firm’s products by customers.

Though Gensler says the agency is busy reviewing comment letters, the strong pushback has some activists worried that the window to wrap up the rules will close if the agency doesn’t move quickly. They’re also concerned that the plan could be scaled back. Another proposed regulation to crack down on inflated ESG claims by fund managers also hasn’t been finalized.

Hanging over the effort are the November elections, with control of both the White House and Congress up in the air. Republican presidential candidates Donald Trump, the party’s front-runner, and Ron DeSantis have railed against ESG policies, calling them “radical-left garbage” and “ideological joyrides,” respectively. The president nominates the heads of the SEC and other top Washington regulators.

“It’s not the SEC’s job to be thinking about the political factors at play, but of course Republicans in Congress have not hidden the fact that they want to erase much of the Biden administration’s regulatory agenda,” the Sierra Club’s Cushing said.

Another complication is the long-standing lack of internal consensus among the agency’s Democrats on how to finalize the package of climate risk disclosure rules. The SEC has stayed tight-lipped about whether public companies will have to disclose Scope 3 emissions, as proposed.

Many corporations report their own pollution, but industry groups have balked at doing the same for their suppliers’ and customers’ emissions. Companies such as Exxon Mobil Corp. and Walmart Inc. have called for the Scope 3 mandate to be scrapped from the final rule.

In the past 21 months, agency staff, commissioners’ offices, climate activists and powerful trade associations have met dozens of times on the rule, with no clear resolution.

As the SEC proposals have lingered, other authorities have plowed ahead on climate disclosure rules. Thousands of US companies will fall under robust California mandates enacted this year and European Union regulations that went into effect in January.

“This is an SEC that came in with a lot of energy and moved quick at the start,” said Allison Handy, a partner at the law firm Perkins Coie who represents public companies. “I’m hopeful that we’re seeing the current commission learn from moving too fast. They’re taking the time to create something that could survive.”

Meanwhile, the agency’s efforts to scrutinize corporate America’s climate and ESG claims appear to have slipped to the back burner. The SEC removed ESG as a focus of its examination staff for 2024. It had been a priority in 2021, 2022 and 2023.

Allison Lee, the SEC’s former acting chair, made a splash in early 2021 by announcing a 22-person task force of enforcement staff to find and prosecute ESG-related misconduct. Since then, the task force has brought four cases on alleged climate-related misconduct. Several others were filed on social or governance grounds.

In three of the enforcement cases, the SEC alleged that investment adviser units at Wall Street banks Goldman Sachs Group Inc., Deutsche Bank and Bank of New York Mellon Corp. made improper ESG investment claims or had procedural failures. The firms paid $24.5 million total in fines to settle the probes, and none of the firms admitted to or denied the SEC’s findings.

“Some expected this year that the SEC would bring a lot of different enforcement actions based on ESG practices and open a new front,” said Brantley Webb, a partner at Mayer Brown who represents retirement plan sponsors on ESG matters. “And I don’t think you’ve seen that.”


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