SEC regulation slows ahead of expected climate disclosure rule



Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.


ESG developments this week

In Washington, D.C.

SEC regulation slows ahead of expected climate disclosure rule

The Securities and Exchange Commission (SEC) under Chairman Gary Gensler has been less active in issuing regulations than any administration in recent history, having issued only 22 rules since April 2021. But more regulations are expected, including a climate disclosure rule that would require certain companies to disclose emissions to the agency. Bloomberg reported that the rule—now nearly a year late, according to Gensler’s own timeline—has generated both anticipation and pushback among observers:

The SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration, risking leaving climate disclosure rules and other planned ESG reporting priorities unfinished.

The Securities and Exchange Commission has adopted only 22 rules since Gensler became the agency’s leader in April 2021, according to a Bloomberg Law analysis. The tally was higher at the same point for the first SEC chairs of every administration since at least George W. Bush’s presidency, though Gensler is closing the gap.

Gensler has less than a year and a half before Republicans could take control of the SEC in a new administration, raising expectations the commission intends to finalize a flurry of environmental, social and governance regulations and other rules in the coming months. …

The climate disclosure rule—poised to become Gensler’s marquee regulation—is expected this fall. The SEC is aiming to adopt the rule by October, a year after an October 2022 completion date the agency initially targeted, according to commission rulemaking agendas. President Joe Biden’s 2020 campaign climate plan included a pledge to require “public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains.”

When the SEC released a draft proposal of the plan in March 2022, several business interests and about two dozen Republican state attorneys general threatened legal action if it moved ahead. The agency’s plans to require big companies to disclose the Scope 3 emissions from their supply chains and other indirect sources are a major point of contention.

Gensler has said he’s heard concerns “loud and clear.” But the chair has declined to say how the climate disclosure proposal may change before it’s finalized—or confirm whether October is a realistic target for finishing it. …

Time may be running out for the SEC to defend a climate rule against lawsuits, if Republicans take control of the agency in January 2025.

Prospective court challenges to a final rule are unlikely to be resolved by then. A Republican-led SEC would have the power to end its defense of the rule, though litigation could continue. The Sierra Club and Earthjustice are strongly considering defending the regulation in court. They also may sue the SEC, if its rule is weaker than what the agency proposed.

A final climate rule also faces a different challenge if the SEC punts the regulation too far into next year. A federal law, the Congressional Review Act, would let a Republican-controlled House and Senate in the next Congress quickly revoke regulations the SEC and other agencies issued in late 2024, if they avoid a presidential veto.


Legal questions related to SEC climate disclosure rule persist

The SEC’s original climate reporting rule was first proposed in March 2022. Three months later, the U.S. Supreme Court issued its ruling in West Virginia v. Environmental Protection Agency, which raised questions about the SEC’s authority to issue the rule. Observers view the decision as one of the reasons for the delay in the release of the revised SEC rule:

The U.S. Securities and Exchange Commission is expected to announce Climate Related Disclosure requirements in October 2023. Even before announcement, concerns are rising that the new rule could be outside the SEC’s authority and unable to sustain a legal challenge before the Supreme Court. …

In March 2022, the SEC announced a proposed rule that would require certain climate related disclosures in initial filings and annual financial reports. …

The proposed rule would require three levels of reporting from publicly traded companies. Scope 1 addresses direct greenhouse gas emissions of the company. Scope 2 addresses indirect GHG emissions from purchased energy. Scope 3, the most controversial, addresses GHG emissions from suppliers and end users of the product….

The legal debate over the SEC’s new rule fits into the broader discussion of the authority of administrative agencies. …

In West Virginia v. Environmental Protection Agency, SCOTUS was asked to address the EPA’s ability to regulate greenhouse emissions relating to the Clean Air Act. In a 6-3 ruling, the Court held that the EPA had overstepped its authority. While the EPA did have some authority to create the new rules and there as ambiguity in the CAA on the issue, the Court found that the new rule was simply to economically and politically important to not be directly addressed by Congress. The major questions doctrine showed up again in Biden v. Nebraska, the case that stopped President Biden’s student loan forgiveness plan. In both cases, the Court did not say that the action could not be taken, simply that the only entity with the authority to take the action is Congress.

Legal challenges to ERISA rule regarding the use of ESG in pension funds are using the same argument against the U.S. Department of Labor. The ultimate success of those challenges is unclear as legal scholars are still adjusting to how the Court applies the doctrine.

The major questions doctrine will come into play in the new Climate Related Disclosure rule. In the proposed rule, the SEC claimed they had authority to develop disclosure requirements that are “necessary or appropriate in the public interest or for the protection of investors.”

Further, the Commission stated, “Investors need information about climate-related risks—and it is squarely within the Commission’s authority to require such disclosure in the public interest and for the protection of investors—because climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.”


On Wall Street and in the private sector

Vanguard joins BlackRock in reducing support for ESG shareholder proposals

As this this newsletter noted last week, BlackRock, the world’s largest asset manager (measured by assets under management), reduced its support for pro-ESG proxy proposals during the past shareholder season. Fox Business reported on August 29 that Vanguard—the second largest asset manager in the world and the largest manager of passive funds—did the same:

The Vanguard Group says it has only approved 2% of the environmental and social resolutions brought by shareholders in 2023, down from 12% last year, joining BlackRock in rejecting a significant number of climate and social items amid pushback against the environmental, social and governance (ESG) movement previously promoted by the investment titans.

Vanguard reported in its Vanguard Investment Stewardship brief for the U.S. region released Tuesday that it received a greater number of environmental and social proposals this proxy season, with shareholders bringing 359 of such resolutions compared to 290 in 2022.

The mutual fund giant said it saw a 50% increase in proposals related to environmental matters alone, and the most common subject was “target-setting for greenhouse gas emissions.”

“Across all sectors in the U.S., we saw companies receive shareholder proposals addressing social topics such as racial equity, reproductive rights, and pay gaps,” the company wrote in its report, adding it also received “several notable proposals” in the consumer sector “concerning unionization and worker safety.”

Vanguard said it “evaluated each one case by case on its merits and in the context of the specific company,” and said the decline in supporting such measures was “largely attributed to the volume and nature of the proposals” as well as improvements in company disclosures that made many resolutions unnecessary.

Vanguard’s report comes the week after BlackRock, the largest asset manager in the world, reported in its 2023 Investment Stewardship report that it turned down 742 of the record 813 proposals it voted on and 373, or 93%, of the social and climate proposals it faced.


Experts question whether ESG is actually losing support

Between BlackRock’s news last week and Vanguard’s news this week, it might appear that ESG is struggling. But some experts are questioning whether ESG investing is actually losing support:

Looking at some recent headlines about the drops in BlackRock’s and Vanguard’s support for shareholder resolutions, it would seem as if ESG is all but dead — with politicians winning the odd battle they’re waging on the asset managers. …

There are plenty of stories out there about the low levels of support (they are indeed low). But there are two things to keep in mind: The number of shareholder resolutions has risen dramatically over the past several years (along with the scope of the demands within them), and big asset managers like Vanguard and BlackRock are hardly at the forefront of sustainable investing.

“It’s not the end of ESG. It’s probably the end of a phase in ESG, though,” said Lindsey Stewart, director of investment stewardship research at Morningstar.

There was a lot of excitement in 2021 when asset managers’ support for ESG-themed proposals was higher, he noted. It was also a time when the SEC started making it difficult for public companies to deny shareholder resolutions votes on their proxy ballots.

But the things shareholders were asking for then are significantly different from what they have leaned toward over the past year, Stewart said.

The drop in the percentage of resolutions BlackRock supported has more to do with the quality of the resolutions than a change in the company’s stance on ESG issues, which it reiterated are material in nature.

Similarly, a Vanguard spokesperson pointed to that firm’s recent report. Although Vanguard’s support for environmental and social proposals dropped significantly, that decline was due in part to resolutions asking for things that companies have already started doing (or are doing enough to satisfy Vanguard).

“Despite changes in voting results, which are driven largely by the volume and substance of the proposals presented, our approach to evaluating shareholder proposals — including those on environmental and social matters — has been consistent over time,” the Vanguard report stated.

Across the board, support for shareholder resolutions declined from a median of 25% in the U.S. in the 2021-2022 proxy season to 15% in the 2022-2023 season, BlackRock noted, citing data from ISS.


In the spotlight

Exxon says fossil fuels are here to stay

Two years ago, Engine No. 1, a sustainability-aligned hedge fund, shook up the shareholder world by challenging four incumbents on the Exxon Mobil board of directors, offering whom they consider to be more environmentally friendly candidates in their places. With the help of California pension funds CalPERS and CalSTRS and the Big Three asset managers (BlackRock, Vanguard, and State Street), Engine No. 1 won three of those four seats and promised to change Exxon’s approach to sustainability. But Exxon Mobil last week said those who support a carbon-free future will likely face disappointment:

Energy use and economic development are inseparable. Where there is energy poverty, there is poverty. And where energy availability rises, living standards rise as well. …

Between now and 2050, developing countries will see GDP per capita more than double, driving higher demand for energy. Meeting that demand with lower-emission energy options is vital to making progress toward society’s environmental goals. At the same time, failing to meet demand would prevent developing nations from achieving their economic goals and their citizens from living longer, more fulfilling lives.

The critical question is how that growing energy demand will be met. Renewable energy continues to hold great promise, and we see wind and solar providing 11% of the world’s energy supply in 2050, five times today’s contribution. Other loweremission options, such as biofuels, carbon capture and storage, hydrogen, and nuclear, will also play important roles. And even with this unprecedented rise in lower-emission options, oil and natural gas are still projected to meet more than half (54%) of the world’s energy needs in 2050. …

The Global Outlook projects that the biggest change in the world’s energy mix between now and 2050 will be a significant increase in solar and wind, along with a significant reduction in coal.

Energy from solar and wind is projected to more than quintuple, from 2% of the world’s supply to 11%. Coal will increasingly be displaced by lower-emission sources of electricity production – not just renewables but also natural gas, which has about half the carbon intensity of coal. Overall, electricity use grows 80% by 2050.

Oil and natural gas are projected to still make up more than half of the world’s energy supply. The utility of oil and natural gas in meeting the world’s needs remains unmatched. They are energy dense, portable, available, and affordable — and serve as essential raw materials for many products we use today.