House Republicans warn SEC against climate disclosure requirements

House Republicans warn SEC against climate disclosure requirements
GOP members of House Financial Services Committee question whether climate risk meets the materiality standard.
JUN 03, 2021

House Republicans warned the Securities and Exchange Commission on Thursday not to impose a requirement for corporate climate-risk disclosure, asserting that the agency would be overstepping its bounds and pursuing a political agenda if it did so.

“We are concerned that in the context of climate change disclosures, the SEC is currently on a course that will take it far afield of its statutory mission to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation,” the 22 Republican members of the House Financial Services Committee wrote Thursday in a letter to SEC Chairman Gary Gensler.

The Republicans questioned whether climate risk would meet the materiality standard for corporate disclosure for all companies. They said that such disclosures depend on the type of business and its carbon footprint.

“For example, risks posed by climate change are fundamentally different between a software company, a cruise line and an oil-and-gas company,” states the letter, which was headed by Rep. French Hill, R-Ark. “One-size-fits-all uniform mandates would be deeply misguided for an issue as complex as climate change.”

The GOP letter landed while the SEC, which now has a 3-2 Democratic majority, is conducting a public comment period on expanding corporate climate disclosures, which are currently voluntary. The comment request is one of several recent moves the SEC has made to bolster ESG oversight, including the launch of a climate and ESG enforcement task force.

The activity dovetails with the Biden administration’s government-wide focus on protecting the environment, which included a recent executive order directing federal agencies to quantify the risk climate change poses to financial assets.

During two recent appearances at online congressional hearings, Gensler has asserted that investors are demanding more information from companies regarding climate risk and other environmental, social and governance investing factors. Republicans pushed back, questioning whether ESG disclosures are material to investment returns.

In a recent speech, Democratic SEC Commissioner Allison Herren Lee said that SEC disclosure requirements don’t have to be limited strictly to material items.

“The idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in our rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG,” Lee said at a May 24 meeting of the American Institute of CPAs.

While she was SEC acting chair before Gensler’s Senate confirmation, Lee led the agency in its flurry of ESG activity, including the creation of the enforcement task force.

The House Republicans are worried about that group. They say the enforcement task force could be hunting for problems with corporate climate change disclosure before the agency has established new disclosure policy.

“The SEC seems to again be going down the path of regulation-by-enforcement, whereby enforcement actions by SEC staff will have the effect of setting rules or standards in the market,” the House GOP members wrote in their letter.

The letter is another example of how ESG policy is causing a partisan fissure on Capitol Hill. Recent ESG legislation was approved by the House Financial Services Committee on party-line votes.

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