SEC approves climate reporting 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.

In Washington, D.C.

SEC approves climate reporting rules

The Securities and Exchange Commission (SEC) on March 6 approved its long-awaited final rules on climate reporting standards. As expected, the new rules eliminated requirements for Scope 3 emissions reporting and reduced Scope 1 and 2 requirements:

The Securities and Exchange Commission approved new rules on Wednesday detailing if and how public companies should disclose climate risks and how much greenhouse gas emissions they produce, but there are fewer demands on businesses than the original proposal made about two years ago.

The rules represent a step toward requiring corporations to inform investors of their greenhouse gas emissions as well as the business risks they face from floods, rising temperatures and weather disasters. An earlier and more all-encompassing proposal faced outspoken Republican backlash and opposition from a range of companies and industries, including fossil fuel producers.

The main difference: Under the original proposal, large companies would have been required to disclose not just planet-warming emissions from their own operations, but also emissions produced along what’s known as a company’s “value chain” — a term that encompasses everything from the parts or services bought from other suppliers, to the way that people who use the products ultimately dispose of them. Pollution created all along this value chain could add up. Now, that requirement is gone.

Commissioner Hester Peirce dissented from the commission’s plan and argued in a statement that the rule was unnecessary and problematic:

As we have heard already, the recommendation before us eliminates the Scope 3 reporting requirements, reworks the financial statement disclosures, and removes some of the other overly granular disclosures. But these changes do not alter the rule’s fundamental flaw—its insistence that climate issues deserve special treatment and disproportionate space in Commission disclosures and managers’ and directors’ brain space. …

The Commission does not point to a persuasive reason to reject the existing principles-based, materiality focused approach to climate risk. While the Commission insinuates that companies focus too little on climate risks, it offers scant concrete evidence of inappropriate reserve, and even highlights that 36% of annual Commission filings include climate information. Our existing disclosure regime already requires companies to inform investors about material risks and trends—including those related to climate—by empowering companies to tell their unique story to investors. …

The Commission, in adopting today’s climate prescriptions, dismisses the role that materiality ought to play in balancing the costs and benefits of disclosure.

Disclosure rules may prompt more investigations of environmental marketing claims  

New disclosure mandates may prompt new investigations of and legal actions against companies and investment funds that fraudulently overstate their ESG-friendliness, according to a recent Thomson Reuters Institute article:

Claims of greenwashing — allegations of fraud related to environmental, social & governance (ESG) matters involving misconduct or misstatements — will emerge more prominently in 2024.

Potential litigation is likely to focus around three major areas of ESG concerning: i) voluntary company disclosures; ii) litigation that challenges products and the integrity of companies’ supply chains; and iii) legal action confronting existing corporate diversity, equity & inclusion (DEI) policies and practices, according to Carl Valenstein, co-head of the ESG practice at Morgan Lewis, and Partner Franco Corrado. In addition, the increasing multifaceted mandates for corporate ESG disclosures worldwide are likely to keep greenwashing as a major challenge into 2025 and beyond.

Greenwashing lawsuits have continued to gain steam as companies have increased their voluntary disclosures concerning ESG-related commitments to satisfy investor and consumer demands. Decarbonization and net zero commitments are at the forefront of this risk and look to remain a hot button topic.

In the states

State attorneys general sue over SEC disclosure rules

In response to the SEC’s March 6 disclosure rules, ten states announced the same day that they would sue to block the regulations:

West Virginia Attorney General Patrick Morrisey on Wednesday announced that a coalition of Republican leaders in 10 states is suing to block the SEC’s just-released rules requiring companies to disclose their carbon emissions.

Morrisey (R) said he and the Georgia attorney general filed a petition for review in the US Court of Appeals for the Eleventh Circuit with support from Alabama, Alaska, New Hampshire, Indiana, Oklahoma, South Carolina, Wyoming and Virginia. Morrisey called the SEC’s rules “a back door move to undermine the energy industry.” …

“We’ve been waiting for this for a very long time,” Morrisey said at a press conference. “And while the administration and SEC has made some changes to the proposed rule, what they’ve released today is still wildly in defect and illegal and unconstitutional.”

On Wall Street and in the private sector

Four banks leave Equator Principles’ signatory list

Four of the largest banks in the world—J.P. Morgan, Citi, Bank of America, and Wells Fargo—have disaffiliated with another climate-related finance organization as of March 5:

Four of the biggest U.S. banks are no longer signatories to the Equator Principles, an industry benchmark for assessing environmental and social risks in project-related finance, its website showed on Tuesday

Set up by the banking industry in 2003, the principles help firms identify, assess and manage potentially adverse impacts created by large infrastructure and industrial projects. …

The departures are the latest example of major financial services companies leaving corporate environmental initiatives since U.S. Republican politicians started suggesting participation could breach antitrust rules.

Morningstar predicts reduced support for ESG shareholder resolutions

Morningstar predicted a continued decline in support for shareholder resolutions promoting ESG in a recent analysis of proxy voting expectations for large American asset management firms:

The 2024 proxy season is set to kick off in earnest. Our latest analysis of fund managers’ current proxy-voting policies, compared with their recent voting records, suggests that their votes on environmental and social topics will continue to diverge, and the falling overall support for ESG-focused resolutions will continue. …

In our latest research paper, we reviewed the voting policies of 10 large US managers: BlackRock, Capital Group, Dimensional, Fidelity, Franklin Templeton, Invesco, J.P. Morgan, State Street, T. Rowe Price, and Vanguard—looking for evidence of potential support for ESG-focused resolutions. …

Overall, the signs point to continued low to medium support among large US managers for generally well-supported key ESG resolutions, as we saw last year.

In the spotlight

Academics question research supporting ESG

Business and finance scholars from Harvard University, London Business School, and other institutions have recently questioned the quality of research promoting an intellectual case for ESG. They argued the research designs and results were flawed:

As Wall Street’s passion for sustainability began surging about five years ago, Andy King looked on with apprehension. Academics at Harvard University, the London Business School and other institutions were churning out research asserting that doing good for people and the planet was also good for company profits. The papers have been quoted in US Senate testimony, cited by regulators crafting corporate climate rules and invoked by Wall Street firms marketing funds valued at billions of dollars.

King, a professor of business strategy at Boston University, questioned the studies’ conclusions. In decades of analyzing whether companies could profitably reduce their harm to the environment, King had found the financial gains were often too small to affect the bottom line. Digging into the latest research, scrutinizing complex mathematical formulas and parsing tens of thousands of data points, he discovered what he says are flaws that skewed the results. “The evidence supporting ESG just wasn’t solid,” King says. …Other scholars are increasingly reaching similar conclusions, with researchers from Columbia University, the University of California at Berkeley, the Massachusetts Institute of Technology and beyond releasing studies that bolster King’s work. These academics, generally supportive of efforts to combat global warming, have sparked a debate over the so-called ESG programs—guided by environmental, social and governance considerations—adopted by many corporations.