On January 18, House Republicans, along with their chosen witnesses, raised concerns about the Securities and Exchange Commission's (SEC) authority to enact its proposed climate disclosure regulation for public companies.
Representative Bill Huizenga (R-Mich.), chair of the House Financial Service Committee's Oversight and Investigations Subcommittee, questioned the SEC's mandate at a hearing about the proposed rule. "The SEC has not been explicitly granted the power by Congress to enforce climate disclosure requirements," he stated. Huizenga also referred to a 2022 Supreme Court decision that limited the Environmental Protection Agency's regulatory capabilities over greenhouse gas emissions, suggesting this might impact the SEC's ability to implement a similar climate disclosure rule.
Introduced in March 2022, the SEC's climate disclosure rule, supported by a wide range of institutional investors and asset managers, mandates that public companies disclose extensive climate-related information in their periodic reports and registration statements. This rule is likely to face legal challenges upon its finalization.
A key point of contention is the proposed requirement for companies to report greenhouse gas emissions. This would involve disclosing both direct emissions and, if relevant, indirect emissions from their supply chains, termed Scope 3 emissions. However, smaller companies would not be required to report Scope 3 emissions.
Charles Crain, Vice President of Domestic Policy at the National Association of Manufacturers, expressed concerns during the hearing about the significant financial burdens this proposal could place on manufacturers and the potential for inundating investors with non-essential information.
Crain, opposing the proposal, highlighted potential legal issues with the rule. "A regulation cannot overlook critical factors in rule-making, such as the impact of Scope 3 disclosures on small businesses, rely on an inaccurate cost-benefit analysis, or surpass the agency's legal jurisdiction," he stated, referencing the Administrative Procedure Act.
George S. Georgiev, a law professor at Emory University and the only witness supporting the proposal, received focused questioning from Democrats on the committee who favor the rule.
Georgiev argued that the SEC has the legal authority to implement a climate disclosure rule based on the agency's founding statutes and powers granted by Congress. He explained that the greenhouse gas emission reporting is designed to inform investors about companies' risks associated with transitioning from fossil fuels. He emphasized that the proposal primarily seeks to enhance capital market efficiency, investor protection, and capital formation through improved information disclosure.
The SEC plans to finalize the proposal in the upcoming spring, as indicated in its latest regulatory agenda, although this schedule has previously been delayed.
In a related development, California Governor Gavin Newsom, a Democrat, signed two pioneering climate-related reporting bills in October. These laws aim to enhance transparency regarding greenhouse gas emissions and climate risks for specific companies operating in California.
