SEC has clear authority to mandate climate disclosures, say former commissioners

Bipartisan working group of former SEC commissioners and chairs back regulator’s right to introduce climate rules, as asset owners call for disclosure proposal to go further.

A bipartisan group of former chairs and commissioners of the US Securities and Exchange Commission (SEC) have stated its “unanimous view” that the financial regulator has the “clear statutory authority to mandate additional climate-related disclosures for publicly traded companies”. 

The working group, which includes former SEC chair Mary Schapiro, now vice-chair of the Glasgow Financial Alliance for Net Zero (GFANZ), outlined its position in a response to the SEC’s consultation on its proposed climate disclosure rule, which ended on Friday.  

The group includes 15 former senior SEC officials, including four chairs, five commissioners, five general counsel and four directors of the SEC’s Division of Corporation Finance. Among them are Republican picks such as Harvey Pitt, who was appointed the 26th SEC chair in 2001 by then President Bush.  

In its submission, the group highlighted previous instances of the SEC mandating disclosure on environmental matters and presented evidence that companies have historically understood that the regulator has “long had authority to take regulatory action in this area”. 

Arguments claiming the contrary, the group wrote, “provide no legal basis to question SEC authority to mandate climate related disclosures at public companies”. 

They urge the SEC to “give little weight to claims that it lacks authority in this area, instead focusing on the difficult policy choices that developing these rules will necessarily require”. 

Last week, Responsible Investor covered Nasdaq’s pushback against the SEC’s proposed climate rule in its consultation response. The US stock exchange “strongly” encouraged the financial regulator to “consider adopting a comply-or-explain framework, or mandatory disclosures only for certain issuers, rather than compelling mandatory disclosures for all issuers”. 

Asset owners want more disclosure, especially on Scope 3

By contrast, asset owners are calling on the SEC to go further in the final rule. In the submission from the Net Zero Asset Owner Alliance (NZAOA), the UN-backed body called for additional disclosure requirements, such as on the degree of alignment between companies’ business models and investment plans with Paris-compliant 1.5°C scenarios. 

The NZAOA represents 73 pension funds and insurers, representing $10.4 trillion in assets.

NZAOA member CalPERS, the largest public defined benefit pension fund in the US, with assets of $450 billion, also responded separately to the consultation. The Californian fund called for all listed companies to be required to disclose their Scope 3 emissions. Under the current proposal larger listed firms will be required to disclose Scope 3 emissions if they are deemed material.   

Scope 3 emissions refer to those throughout a company’s value chain, such as those generated through use of its products. These emissions often account for the vast majority of those linked to a company. 

“Omitting Scope 3 emissions from any sector or individual company would be omitting a significant portion of emissions and would not allow an investor to assess the total emissions profile of such company, or a portfolio or index that the company is included in,” CalPERS stated in its response, signed by CEO Marcie Frost.  

Similarly, the $279 billion New York State Common Retirement Fund urged the SEC to “require all registrants to report scope 1, 2 and 3 emissions, all of which should be subject to assurance”. 

Take materiality test out of firms’ hands, says MSCI 

Sanford Lewis, an attorney at US-based legal adviser Strategic Counsel, also recommended that the SEC require all companies to disclose Scope 3 emissions or at least take the interpretation of materiality out of the hands of the companies.  

He wrote that the proposal as it is “would offer issuers a risky (and I believe inappropriate) loophole through which many registrants could, in essence, buy their way out of disclosure through legal opinions asserting the narrowest interpretations of materiality”. 

This issue was also picked up by US index provider MSCI, which recommended in its submission to the consultation that the final rules should introduce a “defined materiality threshold” for Scope 3 emissions disclosures “rather than rely on individual materiality assessments”. 

MSCI reports that, of the 2,565 companies in the MSCI USA IMI index, currently only 28 percent disclose Scope 1 and 2 emissions, and “only 15 percent disclose some (and not necessarily the most material) Scope 3 emissions”. The index provider also notes “a number of companies” identifying Scope 3 emissions as immaterial when its own research “points to very high materiality, eg in the financial sector”. 

As a user of Scope 3 emissions data, MSCI added, it is important to MSCI that Scope 3 emissions disclosure is consistent and comparable, which will not be achieved under an individual company materiality determination.

The US arm of Legal & General Investment Management (LGIMA) also discussed Scope 3 emissions in its response to the SEC’s consultation, raising a concern that without their inclusion in corporate disclosures “companies may repackage scope 1 and 2 emissions as scope 3 and omit them altogether”. 

LGIMA also responded in its submission to concerns that the burden around proving transition plans might inadvertently result in companies setting fewer climate goals. The investor wrote that this may “ultimately be a good outcome as it would reduce greenwashing by requiring companies to provide a proof of concept on the commitments that they set – effectively requiring more action and fewer words”.