GOP letter hints at strategies to fight SEC climate rule

Senate Banking Committee members did not like SEC Chair Gary Gensler's response to an inquiry

Senate Republicans appear to be gearing up for a prolonged fight against the SEC’s proposed climate disclosure rule for publicly traded companies.

This week, a group on the Senate Banking Committee penned a caustic letter to SEC Chair Gary Gensler, asking that the regulator preserve its communications related to developing the proposal. More tellingly, the committee Republicans cited the recent US Supreme Court ruling in West Virginia’s lawsuit against the Environmental Protection Agency, stating that “that the executive branch and its agencies, including financial regulators, cannot use creative, new interpretations of existing law to pretend they have legal authority to support sweeping policy changes that Congress never intended.”

The letter came in response to Gensler’s answers to an inquiry that members of the banking committee made in June.

“There has never been any doubt in my mind that this regulation, once promulgated, is headed straight to litigation,” said Amy Greer, co-chair of Baker McKenzie’s North America financial regulation and enforcement practice.

“The senators are threatening the [recent] Supreme Court decision, but they’re evaluating this in a number of different ways,” Greer said. That could include assisting in an eventual legal action

“They’ll throw the book at them. They’ll raise every possible issue,” she said. “The current Supreme Court view on the jurisdiction of executive agencies and the scope of that decision is really front and center right now.”

Depending on the facts raised and the judge presiding over the case, “the decision is going to be a problem,” Greer said.

For or against

The broad arguments either for or against the SEC’s proposed rule, which would require publicly listed entities to disclose their greenhouse gas emissions, are based in part on the interpretation of materiality.

Supporters of the proposal have contended that emissions profiles are often financially material, but opponents have clearly argued otherwise.

In their initial letter to Gensler, the Senate Banking Committee Republicans wrote that “almost none of [a company’s global warming data] is material to a business’s finances.” The Republicans criticized the SEC for crafting a rule whose alleged purpose is primarily to address climate change. They said the proposal would hurt “the entire US economy” and could have an adverse effect on energy prices.

However, the SEC’s proposal itself would not require oil companies or other carbon-intensive businesses to change their ways – it would make them communicate more information and potential risks to investors. Financial services companies generally have supported the proposal.

“This will play out against a marketplace … where corporations continue to put out this information in an unregulated way. And the SEC’s view is that they have to have a role in regulating and structuring that information to make it meaningful for investors,” Greer said. “It’s clear that the market has decided that investors want this information.”

Broader fight

The new criticisms come amid what appears to be a loose campaign against financial regulations that have any bearing on climate change – part of a wider conservative rally against “wokism.”

Some states, for example, have proposed or passed laws that could blacklist asset managers that have products that avoid investing in fossil fuels. A Texas law is seeking to prevent such financial services companies from managing any public money.

This month, House Republicans tried, unsuccessfully to have a rider added to an appropriations bill that would have blocked funding associated with the SEC’s proposed climate disclosure rule.

A House Financial Services subcommittee hearing on Tuesday also highlighted the tenor of GOP views about the SEC’s ESG oversight. The agency’s director of enforcement, Gurbir Grewal, was grilled by Republicans over enforcement actions that revolved around ESG.

Information request

Republicans took issue with Gensler’s response to their inquiry, accusing the SEC of dodging questions and lacking transparency about its records retention practices. The SEC response came two weeks after a deadline the banking committee members had requested, they said in the recent letter, calling Gensler’s comments “unacceptable.”

“We asked only a few simple and straightforward questions, including questions that should result in simple ‘yes’ or ‘no’ answers such as: ‘Has the SEC considered the impact that the proposed climate disclosure rule would have on energy prices and any other costs associated with the rule?’; and ‘Has the SEC coordinated with any other Federal agencies on the policies contained in the proposed climate disclosure rule?’” the committee members wrote.

In response, Gensler noted that the SEC’s Division of Corporation Finance staff would be available for a briefing to answer the committee’s questions. He also cited federal records retention laws that apply to the SEC.

“This question of documents has more to do with the typical challenge to SEC rulemaking, which is, ‘Have you followed all of the appropriate steps?’” Greer said. “Have you considered all of the appropriate stakeholders? Have you dotted all the i’s and crossed all of the t’s – and can you prove it?”