Statement by Commissioner Peirce on Final Rules Regarding Mandatory Climate Risk Disclosures

Thank you, Mr. Chair. The final rule is different from the proposal, but it still promises to spam investors with details about the Commission’s pet topic of the day—climate. 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. Because the Commission fails to justify that disparate treatment, I dissent.

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.[2] 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’s 2010 climate guidance explains how climate-related issues, particularly pertaining to a company’s financial condition, could be required in disclosures under the Commission’s existing regime.[3] Under current rules, companies may have to disclose, among other things, information relating to the “[i]mpact of legislation and regulation,” “international accords,” “[i]ndirect consequences of regulation and business trends,” and “[p]hysical impacts of climate change.”[4] And, although the responsibility for disclosing lies with the company, the Commission’s Division of Corporation Finance reviews company filings and sends comment letters to companies to ensure that they are fulfilling this responsibility. Companies that do not make accurate or complete disclosures could face enforcement actions or private lawsuits.

The Commission does not persuasively explain why principles-based rules, staff disclosure review, and enforcement actions are not effective in eliciting the climate disclosure the objectively reasonable investor needs. To the contrary, the Commission has a strong view of the power of existing rules to elicit climate disclosure. For example, the Commission today, in deciding not to adopt the proposed financial statement metrics, warned that companies might have to make those disclosures anyway under existing rules.[5]

The Commission, in adopting today’s climate prescriptions, dismisses the role that materiality ought to play in balancing the costs and benefits of disclosure. Information is material if there is a substantial likelihood that an objectively reasonable investor would consider the information important to an investment or voting decision.[6] All reasonable investors value financial returns, but they may diverge on which non-economic considerations are important.[7] A regime rooted in materiality helps companies inform investors without spamming them with information that is irrelevant to the company’s financial picture.[8]

This rule replaces our current principles-based regime with dozens of pages of prescriptive climate-related regulations. While the Commission has decorated the final rule with materiality ribbons, the rule embraces materiality in name only.[9] The resulting flood of climate-related disclosures will overwhelm investors, not inform them. The rule mandates specific granular disclosures. These include, to list a few, the process of how a company’s board oversees and is informed of climate risk,[10] how a company’s management assesses and manages material climate risk,[11] which management positions manage climate risk and the associated expertise,[12] the geographic location of physical climate risk,[13] and how climate risks affect items like a company’s “[p]roducts or services,” “suppliers,” climate mitigation activities, and “expenditures for research and development.”[14] Protestations of materiality also trip over the absurdly low de minimis thresholds for disclosing how severe weather events and other natural conditions affect a company’s financial statements. The threshold is only $100,000 for expenditures expensed as incurred and losses in the income statement[15] and $500,000 for capitalized costs and charges recognized on the balance sheet.[16]

By rejecting a principles-based regime grounded in materiality for climate, the Commission could trigger a hodgepodge of requirements tailored to meet the demands of a vast and ever-expanding panoply of special interests.[17] A pro-life investor, an anti-cannabis investor, or an anti-war investor might want idiosyncratic information to assess a company’s performance on those respective issues. Employees, customers, suppliers, social activists, local communities, and other interested non-investors will now line up to get the information they want to know included in disclosures for which shareholders have to pay. Even asset managers – whom the Release wrongly classifies as investors – and institutional investors may be driven by something other than financial returns when they seek information.[18] An asset manager, for example, may need data – not to serve its clients – but to satisfy a climate pledge the adviser made when it voluntarily joined a climate action organization.[19]

However well-intentioned, these particularized interests do not justify forcing investors who do not share them to foot the bill. Congress did not create this agency to satisfy the wants of every investor, but to serve the interests of the objectively reasonable investor seeking a return on her capital. We lack the expertise to oversee these special interest disclosures, and only a mandate from Congress should put us in the business of facilitating the disclosure of information not clearly related to financial returns.[20] As Commissioner Roberta Karmel concluded in 1978, when debates about the role of Commission disclosure were raging as they are today: “[D]espite the legitimate concerns of ethical investors, I believe we should exercise caution in applying a non-economic standard of materiality to disclosure requirements . . . .”[21] Wading into non-economic issues involves tradeoffs that only our nation’s elected representatives have the authority and expertise to make.[22] If we lose our focus on objectively reasonable investors, special interest groups will turn to us to achieve what they cannot accomplish through normal political channels.

Despite cost-saving changes from the proposed rule, the final rule will prove expensive for public companies and their shareholders who will be paying for climate disclosure spam. The Commission performs impressive math-crobatics to slash the anticipated cost of the rule by almost 90 percent,[23] but even with these potentially understated estimates, the Commission still must concede that this rule will increase the typical external costs of being a public company by around 21%.[24] The rule is particularly likely to overwhelm small public companies, many of which are already struggling under the costs of being public.[25] At a time when few companies are choosing to go public,[26] why would we add so substantially to the price tag?

To comply with the new rule, public companies will need elaborate internal control systems and disclosure control procedures to capture and distill information related to physical and transition risks, severe weather events, severe natural conditions, and greenhouse gas emissions.[27] They will hire third-party climate consultants, assurance providers,[28] internal and external counsel, and information technology professionals; face legal liability through Commission actions and the inevitable flood of class actions for their mandated filed disclosures;[29] and bear the indirect costs of lost management time, board distraction,[30] and disruptive changes in company operations. The new financial statement disclosures could force smaller companies to overhaul their existing accounting software.[31] Even companies that do not end up reporting material climate risks or expenditures will be forced to invest in systems to reach a determination that they do not have material items to disclose.[32] The Commission does not take full account of the costs to make such a non-materiality determination.[33] Requiring public disclosure of such extensive climate information, including on governance processes, will reduce companies’ flexibility in responding to all kinds of risks, including climate risks, and deter them from engaging in substantive improvements to business processes.[34]

The rule’s anticipated benefits do not outweigh the costs. Proponents of a Commission climate rule hope that it will yield more accurate, comparable, and complete climate disclosures. If we do not look at it too closely, the final rule might appear to fulfill those hopes. But a closer inspection brings us crashing back to the reality that many climate disclosures are high-priced guesses about the present and future. Measurement and reporting are not standardized within companies, let alone across companies.

Attempts to treat climate data on par with financial data are strained. Despite ongoing efforts to improve climate data collection and analysis, they are still imprecise.[35] For example, commenters highlighted the difficulty of accurately predicting potential physical climate risks[36] and transition risks.[37] Technical compliance with this rule will produce authoritative-looking results, but underlying them will be layers of assumptions and extrapolations. Different companies will take different approaches to resolving these uncertainties, which will undermine comparability.[38] More bespoke disclosures, such as the current rules allow, better inform investors, and, over time, companies likely would coalesce around approaches that generated reliable and comparable disclosures. Letting that process play out organically would be superior to the top-down approach we are embracing today.[39] The final rule attempts to short-cut this admittedly protracted market-driven process, but the result will be unreliable disclosures that mask real differences across companies. Also concerning is the possibility that the back-of-the-envelope guesswork underlying climate disclosures will bleed into the financial statements and other disclosures, thus undermining the effectiveness of our disclosure and financial reporting regime. As efforts to integrate financial and climate reporting proceed, the lower standards accepted by necessity for climate reporting and assurance could bring down the quality of financial reporting.

While the Commission feigns agnosticism about how public companies should think about climate risks, the prescriptive nature of this new climate regime will affect corporate behavior. Through an extensive set of leading disclosure items, the Commission steps into the shoes of the corporate board, nudges corporate decision-making, and distorts corporate supply chains.[40] These new disclosure requirements are rooted in what “the Commission believes should matter to investors.”[41] The Commission is forcing individual public companies to operate in a conduct-altering disclosure regime that may have no direct relevance to their situation. The Commission argues that it is well within its authority in adopting this rule, but the argument we make for our authority here has no limiting principle.

The Commission could have simply required companies to disclose material climate risks that they already recognize and explain how they manage them.[42] Such an approach would not have conveyed an expectation that companies devote vast new resources to assessing, managing, and disclosing climate risks that the Commission has identified for them. It also would have been consistent with the current required disclosure of “material events and uncertainties known to management that are reasonably likely to cause reported financial information.”[43]

We should be re-proposing this rule not adopting it. The final rule differs quite dramatically from the proposal, both by excluding major provisions and including new rule elements. A re-proposal would have helped us better assess these changes. It also would have helped us to understand recent legal developments in California and Europe that raise complex cost and mutual recognition issues.[44] Rather than grappling with these issues in the cost-benefit analysis, the Commission confesses to lacking the data to accurately assess them.[45] This approach does not give fair notice to the public or allow commenters the opportunity to address anything that closely resembles today’s final rule.[46]

Although I do not support the recommendation before us, I do want to acknowledge the multi-year effort underlying it. Analyzing these difficult issues and the voluminous comment letters was a monumental challenge. I appreciate all the long and late hours you devoted to producing today’s rule. I also appreciate the many hours you spent with me and my staff discussing the rule. Thank you to Mika Morse, Erik Gerding, Luna Bloom, Valian Afshar, Elliot Staffin, and other staff in the Division of Corporation Finance, Shaz Niazi, Erin Nelson, Mamta Soni, and Meagan Van Orden in the Office of Chief Accountant, the Division of Economic and Risk Analysis, and the Office of General Counsel, as well as others throughout the Commission who worked on this rule.

I have several questions:

1. Although the cost estimates for this rule are dramatically lower than the cost estimates for the proposed rule, my understanding is that, based on our estimates, 15 percent of a company’s annual SEC disclosure costs would be attributable to climate disclosures.[47]
   1. Do we plan to go back in several years to assess the accuracy of these estimates and whether the benefits of the rule outweigh the costs? If so, what metrics do we plan to use for assessing whether the rule has succeeded in meeting its objectives?
   2. Our cost estimates omit the cost for large accelerated filers and accelerated filers to make a materiality determination on their Scopes 1 and 2 emissions if such companies ultimately omit this data from their disclosures. Do you have any sense of what it could cost companies to make a materiality assessment?
2. The Release promises investors “more detailed, consistent, reliable, and comparable information about climate-related effects on a registrant’s business and financial condition.”[48] Does any company’s climate reporting today reflect the same level of consistency, reliability, and comparability that financial reporting does? If not, how long do you think it will take for climate reporting to be as consistent, reliable, and comparable as financial reporting?
3. Even with Scope 3 off the table, the greenhouse gas emissions disclosures seem to be something new. One commenter explained it this way: “The SEC’s justification for the disclosure is that governments, regulators, or consumers might take action against GHG emissions that might cause a negative financial effect at the company that might be significant to a reasonable investor. The reliance on this series of possibilities is on top of the reliance on the uncertain and imprecise methods for calculating GHG emissions. The chain connecting an undependable disclosure of GHG emissions to a material financial effect on the disclosing company is long and speculative. The outward look and the speculative nature of requiring disclosure of GHG emissions make that disclosure obligation different from nearly all other mandatory SEC disclosures.”[49]
   1. Why isn’t this commenter right that we are dealing with a new kind of rule here, and perhaps one for which we have no statutory authority?
   2. What unique enforcement challenges does such a rule pose?
4. Given that we take the position that we have broad authority to mandate climate disclosures, do we have the authority to preempt California’s recently passed disclosure law, which appears to be intended to serve as a national standard?
5. The term “natural condition” is undefined.
   1. What is a severe natural condition?
   2. Is a global health pandemic a severe natural condition?[50]
   3. If so, is it covered by the rule? If not, what in the rule text tells me that it is not covered?
   4. Why don’t investors need disaggregated disclosure of capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe global pandemics to better understand the effect such events have on the financial statements?
6. Applying the final rule, even though it is easier than what was proposed, presents challenges.
   1. Consider a company that is building a new asset. It considers flood risk because the company, in its two-hundred year history, has experienced a flood every ten years. Would the company’s decisions relating to managing flood risk for an asset qualify either as an activity to mitigate climate risk or a transition plan?
   2. If a company creates a low-carbon product or expands its supply of a low-carbon product because of increased customer demand, without considering whether the increase is due to climate change, where does that activity fall under the rules?[51]
   3. How should a public company disclose transition risk if electoral outcomes could drastically alter the risk it faces?
   4. Does “climate-related risk” include a situation in which there is reduced demand for electric vehicles, as a result of consumer demand, political, legal, or other factors?
   5. Would an automobile manufacturer’s decision to shift away from EVs to accommodate consumer preferences be considered a “transition plan”?
7. I expect that companies will spend a substantial amount of time, money, and stress on putting controls in place to comply with various aspects of the rule and then obtaining assurance where that is required.
   1. What similarities and differences do you anticipate seeing as compared with issuers’ experience with developing and obtaining auditor attestation for internal controls under the Sarbanes-Oxley Act?
   2. Are there lessons we learned from that experience that we can apply here?
8. The rule permits issuers to hire non-auditor assurance providers.
   1. Will a non-accountant assurance provider be able to come to the Office of Chief Accountant for advice on complying with, and no-action relief from, the independence requirements and no-action relief?
   2. If so, how will the Commission be apprised of advice and relief given?

Endnotes

2Release at 617, Table 4.(go back)

3Commission Guidance Regarding Disclosure Related to Climate Change (Feb. 8, 2010), https://www.sec.gov/files/rules/interp/2010/33-9106.pdf. The financial nature of this 29-page guidance is evident in that it references the term “financial” 51 times and clarifies that climate information could be relevant to items like risk factors and “Management’s Discussion and Analysis of Financial Conditions and Results of Operation.” Id. at 15, citing Item 503(c) of Regulation S-K and Item 303 of Regulation S-K.(go back)

4Id. at 21-27(go back)

5See Release at 448 (“[W]e emphasize that registrants currently have an obligation under GAAP to consider material impacts on the financial statements, and the fact that the impact may be driven by climate-related matters does not alter registrants’ financial reporting obligations. Therefore, a registrant should consider whether it currently has an obligation to disclose information that would have been covered by the proposed Financial Impact Metrics.”) (footnote omitted).(go back)

6See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).(go back)

7See Sean Griffith, What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment, 101 Nebraska L. Rev. 876, 921 (2023), https://ssrn.com/abstract=4118755 (“Because all investors invest with an expectation of a financial return, the interest that investors, as a class, share is the financial return of the investment. Investors, like all people, may have other interests besides financial return. People might care about clean water, breathable air, and puppies. But, given a large enough group, there will be others who are indifferent, opposed, or even if they share the same general preferences, have an ordinal ranking of preferences that renders them opposed to action on a specific issue. In markets, the law of large numbers will operate to cancel out offsetting preferences, leaving the one interest that all investors share—that is, their interest in a financial return.”).(go back)

8Dave Lynn, SEC Historical Society: The Evolution of Materiality at 5:29 (Feb. 15, 2024), https://www.sechistorical.org/museum/events/materiality-2024.php (“We don’t have a system here in the United States where companies do a data dump of information and then rely on investors to sort out that information. We have a system where we are carefully curating the information that investors have access to and that’s a way of avoiding the problem of having investors be subject to information overload.”).(go back)

9The Release uses “material” or “materiality” almost one thousand times. Even so, materiality is still missing in some key places. For example, the required board disclosures in item 1501(a) do not reference materiality. Item 1501(b) references materiality when it clarifies that companies need only describe how their management handles “material climate-related risks.” However, this forces companies with material climate risk to provide Item 1501(b)’s disclosures, even if it is immaterial information.(go back)

1017 CFR § 229.1501(a).(go back)

1117 CFR § 229.1501(b).(go back)

1217 CFR § 229.1501(b)(1).(go back)

1317 CFR § 229.1502(a)(1).(go back)

1417 CFR § 229.1502(b).(go back)

1517 CFR § 210.14-02(b)(1).(go back)

1617 CFR § 210.14-02(b)(2).(go back)

17What’s “Controversial” About ESG? at 918-919 (“Investors might want . . . disclosure of affirmative information to assist them in evaluating whether to invest. What disclosures are these? Since publicly traded companies have a vast number of investors, each with their own preferences, the answer might be literally anything. Some investors will want more detail about the company’s operations—board minutes, for example, or details from financial advisors’ presentations to the board. Other investors will want the disclosure of non-financial information that they consider important. For example, pro-life investors might want granular details about whether a company’s products are used in manufacturing or distributing abortifacients or, more broadly, corporate health insurance plans’ coverage of women’s health. Other investors may want to know whether a corporation engages in offshoring or the extent to which it imports materials from countries known to abuse human rights. Others will want to know about the company’s diversity policies.”).(go back)

18See, e.g., Letter from Cato Institute at 5 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132199-302715.pdf (“[M]any of the large institutional investors cited by the Commission are also conflicted, either seeking to meet climate pledges of their own or seeking to profit from pursuing what appear to be popular strategies.”) (citations omitted); Paul Mahoney & Julia Mahoney, The New Separation of Ownership and Control: Institutional Investors and ESG, 2 COLUM. Bus. L. REV. 840, 851-2 (2021) (“Why, then, are institutional investors and political activists pressing for the SEC to require an expanded and standardized set of ESG disclosures . . . ? For political activists, the answer is straightforward: they want to use the information to prod companies to change policies in socially-motivated directions . . . . Such disclosures facilitate an ordinal ranking of companies that can serve as a focal point to organize boycotts, demonstrations, and social media campaigns against ‘brown’ companies. The SEC should consider the possibility that this is also an important goal of institutional investors who argue for ESG disclosures.”).(go back)

19For example, Climate Action 100+ is composed of over 700 global investors across 33 markets with more than $68 trillion in assets under management (“AUM”). See Climate Action 100+, About Climate Action 100+, https://www.climateaction100.org/whos-involved/investors/ (last visited Mar. 2, 2024). Signatories are expected to “[i]mplement a strong governance framework” on climate risk, “[t]ake action to reduce greenhouse gas emissions across the value chain,” and “[p]rovide enhanced corporate disclosure and implement transition plans to deliver on robust targets.” Climate Action 100+, The Three Goals, https://www.climateaction100.org/the-three-goals/ (last visited Mar. 2, 2024). Some asset managers have backed away from these pledges. See, e.g., Simon Jessop, Invesco joins list of US asset managers to exit CA100+ climate group, Reuters (Mar. 1, 2024), https://www.reuters.com/sustainability/invesco-joins-list-us-asset-managers-exit-ca100-climate-group-2024-03-01/ (“Invesco on Friday became the fifth major U.S. investor to exit or scale back their involvement with the Climate Action 100+ coalition of investors . . . . Invesco said in a statement it had ‘decided to withdraw from the Climate Action 100+ initiative as we believe our clients’ interests in this area are better served through our existing investor-led and client-centric issuer engagement approach.’”).(go back)

20See Letter from Andrew Vollmer at 6 (Apr. 12, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20123525-279742.pdf (“Andrew Vollmer 1”) (“The statutory context of the Securities Act and the Securities Exchange Act limits the SEC’s power to issue disclosure rules to specific types of information closely related to the disclosing company’s value and prospects for financial success. . . . Some exceptions exist, but Congress, not the SEC, has introduced those.”); Letter from Society for Corporate Governance at 8 (Jun. 17, 2022), https://sec.gov/comments/s7-10-22/s71022-20132044-302525.pdf (“Notably, as the Commission itself has pointed out, when Congress wishes to later expand the subject matter of mandatory disclosures beyond matters that are financial in nature, it specifically does so by statute, as it has done for topics such as executive compensation, corporate governance, and conflict minerals.”) (citations omitted).(go back)

21Commissioner Roberta Karmel, Changing Concepts of Materiality, SEC (Apr. 12, 1978), https://www.sec.gov/news/speech/1978/041278karmel.pdf.(go back)

22See Letter from United States Senators Pat Toomey, Richard Shelby, Mike Crapo, Tim Scott, M. Michael Rounds, Thom Tillis, John Kennedy, Bill Hagerty, Cynthia Lummis, Jerry Moran, Kevin Cramer, and Steve Daines at 2 (Jun. 15, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20133994-303877.pdf (“Addressing matters like global warming requires political decisions involving tradeoffs. In a democratic society, those tradeoffs must be made by elected representatives, who are accountable to the American people, not unelected financial regulators.”).(go back)

23The Commission estimated that the proposed rule would have imposed a cumulative external cost burden on public companies of around $6.4 billion annually for filing the Form S-1 and the Form 10-K. Those same cumulative costs in the final rule are now $628 million annually. To be consistent with the final rule’s hourly costs, I adjusted the estimated hourly professional costs in the proposed rule from $400 to $600 to reach the proposed rule’s cost of $6.4 billion. See The Enhancement and Standardization of Climate-Related Disclosures for Investors,87 FR 21334, 21461, PRA Table 4 (April 11, 2022), https://www.govinfo.gov/content/pkg/FR-2022-04-11/pdf/2022-06342.pdf (“Proposed Rule”). For the final costs see Release at 827, PRA Table 7.(go back)

24Release at 827, PRA Table 7. The “typical” numbers refer to the external cost burden of filing the Form S-1 and the Form 10-K.(go back)

25See, e.g., Letter from the Biotechnology Innovation Organization (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132154-302645.pdf (arguing that emerging biotechnology companies will have to spend resources on materiality determinations, board disclosures, and management level disclosures; noting that the management level disclosures will force companies to hire consultants and lawyers to complete; and arguing that a final rule that imposes excessive costs on smaller companies will reduce the number of companies that go public and ensure that the only companies that can go public will be large).(go back)

26Annual IPOs have dropped by around 40% from the 1990s. The 1990s averaged around 412 IPOs per year compared to an average of 248 each year over the last ten years. Data calculated from Table 15b of this dataset. See Jay Ritter, Initial Public Offerings: Updated Statistics, Special Purpose Acquisition Company (SPAC) IPOs, 1990-2023 (Feb. 23, 2024), https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf.(go back)

27For example, the Commission admits that companies with material Scopes 1 and 2 emissions levels “may . . . need to adopt further controls and procedures, including measurement technologies and other tools to track and report the information to the extent they do not already do so.” Release at 684. Even companies that already track related emissions could have to invest “in systems or technologies to better measure Scope 1 and Scope 2 emissions” to improve their data. Id. at 685.(go back)

28See, e.g., Letter from American Hotel & Lodging Association at 7 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132072-302553.pdf (“Obtaining ‘limited assurance’ is a time- and resource-intensive process that would consume a large proportion of our members’ sustainability budgets.”); Letter from ConocoPhillips at 14 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131839-302285.pdf (“[T]he availability of assurance providers is currently insufficient to meet demand and will likely trigger a surge in costs: the current estimate for assurance costs reflected within the Proposal of $15,000 is grossly underestimated; when comparing to current assurance services of a similar size provided by our external financial statement auditors, costs could easily be many orders of magnitude larger than the amount estimated within the Proposal.”); Letter from Corteva Agriscience at 7 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132346-302911.pdf (“Because GHG emissions disclosures and the related assurance practices are developing practices, for both registrants and assurance providers, we expect the preparation for, and execution of, these assurance engagements to be time consuming and costly.”).(go back)

29See Letter from Transocean at 10-11 (Jun. 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131743-302178.pdf (“Moreover, we believe that inclusion of climate-related information in filings to the Commission significantly increases risk of shareholder litigation, including from the active plaintiff bar, a risk that investors in registrants should not be forced to bear.”); Letter from Professor Amanda Rose at 2 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132215-302734.pdf (discussing the climate risk disclosures and arguing that “[i]f the proposal becomes law in its current form, any registrant that experiences a climate-related event that has a negative effect on its stock price will be vulnerable to a federal securities fraud class action.”).(go back)

30See, e.g., Letter from Western Midstream at 2 (June 15, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131435-301619.pdf (“Even investors who are appreciative of climate-related disclosures are highly unlikely to elevate those concerns above financial return or tolerate the diversion of significant financial or managerial resources to improve climate-related disclosures without a corresponding improvement in financial performance.”); Letter from Sharfman and Copland at 13-14 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131661-302049.pdf (explaining that disclosures about “the whether and how of board decision-making . . . make the board extremely vulnerable to second-guessing and public criticism by shareholders and investment advisers to index funds who lack the information, experience, and skill to make informed decisions.”).(go back)

31See, e.g., Letter from CohnReznick LLP at 5 (Jun. 22, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132716-303207.pdf (“We observe that many smaller and middle-market issuers utilize standard general ledger accounting packages that offer limited expenditure tracking functionality. Such smaller and middle-market issuers often prepare their cash flow statements on a consolidated basis using simple spreadsheets outside of their general accounting system.”).(go back)

32See Release at 742 (noting that “some registrants may need to expend resources to first determine whether particular disclosure items are material, even in cases where registrants ultimately determine they do not need to make disclosure.”).(go back)

33The Commission clarifies that it has “not provided a standalone cost estimate of making . . . materiality determinations . . . .” Id. at 743.(go back)

34Letter from Amberwave at 8 (Jun. 8, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20130710-299591.pdf (“By imposing the Commission’s preferred measures and standardizing market practices, we expect the Climate Proposals to harm innovation in environmental disclosures, and as a result, harm investors and undermine environmental policy aims over the long-term.”); Charles Whitehead, Is Now the Right Time to Mandate Costly Climate Disclosure?, The CLS Blue Sky Blog (Mar. 29, 2022), https://clsbluesky.law.columbia.edu/2022/03/29/is-now-the-right-time-to-mandate-costly-climatedisclosure/ (“The upshot is that the new Climate Rules will impose higher costs on private and public companies that are pursing early-stage low-carbon technologies precisely at a time when we need to be able to efficiently fund and grow those and future businesses.”); Letter from Americans for Tax Reform at 5 (Jun. 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131656-302041.pdf (“[R]ecent academic research has shown that adopting more extensive disclosure requirements harms innovation. A study of European countries found that ‘more-extensive financial-reporting mandates were negatively associated with innovation inputs such as personnel working in research and development, and with outputs such as new processes and products.’ The SEC’s attempt to copy European climate disclosures will harm innovation, not improve it.”) (quoting Martin Daks, Mandated Financial Disclosure Leads to Fewer Innovative Companies, Chicago Booth Review (Jun. 6, 2022), https://www.chicagobooth.edu/review/mandated-financial-disclosure-leads-fewer-innovative-companies).(go back)

35See, e.g., Letter from Benjamin Zycher at 2-3 (Jun. 17, 2022), https://sec.gov/comments/s7-10-22/s71022-20132286-302818.pdf (“No public company and few, if any, government administrative agencies are in a position to evaluate climate phenomena, whether ongoing or prospective, with respect to which the scientific uncertainties are vastly greater than commonly asserted. The range of alternative assumptions about central parameters is too great to yield clear implications for the climate ‘risks’ facing specific public companies, economic sectors, and geographic regions.”).(go back)

36See, e.g., Letter from Independent Petroleum Association of America at 4 (Jun. 13, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131018-300379.pdf (“IPAA”) (“Similarly, determining the nature and scope of physical risks depends on the assumptions that are used to assess the magnitude and type of climate related events. There is a wide array of assumptions that can be used to develop climate risk scenarios; it is an inexact science.”); Letter from Boyden Gray and Associates PLLC at 105-110 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132160-302652.pdf (listing multiple reasons why the Commission’s “required disclosure of ‘chronic risks’ [is] far too speculative.”); Letter from Energy Transfer LP at 36 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132080-302561.pdf (“[D]etermining physical risks requires the use of assumptions, speculations, and models to determine those risks, all of which can result in radically different results.”); Letter from John R. Ashcroft, Missouri Secretary of State, at 2 (Jun. 8, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20130705-299575.pdf (“[P]redicting [the] potential future occurrence and likely impact [of physical climate risk] on a company or its business associates with any degree of assurance seems a formidable, speculative task unlikely to provide consistent, reliable decision useful information. I do not believe requiring public companies to calculate the risks of future weather conditions to be realistic, any more than I can predict when and where the next Midwestern tornado will wreak havoc.”).(go back)

37See, e.g., Letter from Cato Institute at 12 (“Seeking to estimate risk to a particular company . . . from potential changes in markets, technology, law, or policy in response to climate change is a task that rests, at best, on informed speculation.”); Letter from Dave Gaddis (May 31, 2022), https://www.sec.gov/comments/s7-10-22/s71022-296328.htm (“These transition assessments are rooted in prophecies of coming governmental and market action, but experience teaches us that such prophecies often do not come to fruition. Markets and technology are inherently unpredictable. Domestic legislative efforts in this context have failed for decades, and international agreements, like the Paris Accords, have seen the United States in and out and back in again. How could this proposal thus elicit comparable, consistent, and reliable disclosure on these topics?”); Letter from IPAA at 5 (“[P]rojecting regulatory, technological and market changes across time is virtually impossible to do with accuracy. No projection in 2019 would have included a COVID pandemic or a Russian invasion of Ukraine. Energy demand projections over time have consistently been limited with respect to both total supply and demand and segment supply and demand.”).(go back)

38See, e.g., Letter from David Burton at 8 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131980-302443.pdf (“A choice of discount rate would need to be made. Estimates would need to be made of the cost of various aspects of climate change (sea level rises, the impact on agriculture, etc.). Estimates would need to be made of the cost of various remediation techniques. Guesses would need to be made about the rate of technological change. Guesses would need to be made about the regulatory, tax and other responses of a myriad of governments. Estimates would need to be made using conventional economic techniques regarding the economic impact of those changes which, in turn, will reflect a wide variety of techniques and in many cases a thin or non-existent empirical literature. Guesses would need to be made of market responses to all of these changes since market participants will not stand idly by and do nothing as markets, technology and the regulatory environment change.”).(go back)

39Letter from Professor J.W. Verret at 5 (Jun. 8, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20130713-299599.pdf (“[C]limate reporting could benefit from continued evolution and competition between various organically developed methodologies utilized in the existing voluntary reporting dynamic. . . . Financial accounting did not evolve through some top-down edict requiring immediate standardization but instead evolved through feedback from technical practitioners over hundreds of years.”); Letter from Energy Transfer LP at 11 (“[V]oluntary disclosure regimes allow the time and space necessary for these standards to evolve and organically adjust to investor needs, while the Proposed Rule would ossify the requirements before they have had time to fully develop.”).(go back)

40Dropping Scope 3 disclosures and the requirement to analyze climate risks across a company’s value chain should help farmers, small companies, and others in the supply chains of companies that would have had to assist public companies in making these disclosures under the proposal. But these entities are not off the hook. Companies must still disclose material physical and transition risks, including risks in their supply chains. The Release provides that companies must still disclose supply chain risk if it “has materially impacted or is reasonably likely to materially impact” the company. Release at 91. The Release says that a company “may be able to assess the material risks posed by its value chain without having to request input from third parties in its value chain.” Id. But public companies likely will demand information from their suppliers. Companies could cut suppliers that cannot meet their information demands or streamline their supply chains to enable them to work with a smaller number of suppliers on building systems to collect the required information. Smaller suppliers are likely to suffer disproportionately.(go back)

41Letter from Energy Infrastructure Council at 3 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131767-302201.pdf.(go back)

42See Letter from PricewaterhouseCoopers LLP at 3 (Jun. 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132060-302540.pdf (“Given the uncertainty surrounding climate change—particularly over the long term—there is a risk that a broad requirement to disclose all climate-related risks that are ‘reasonably likely to have a material impact on the registrant’ may trigger a long list of boilerplate disclosures. Focusing disclosures on the climate information that the registrant’s management uses to make strategic decisions would improve its usefulness, while simultaneously reducing the burden on registrants. We recommend an approach that leverages the MD&A principle of allowing investors to look at a company ‘through the eyes of management,’ tailoring disclosure of risks through the application of a management lens.”).(go back)

4317 CFR § 229.303(a) (Item 303) Management’s discussion and analysis (MD&A) of financial condition and results of operations (emphasis added). I am not implying that MD&A is a model of clarity. See, e.g., Letter from Andrew Vollmer at 8-10 (May 9, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20128334-291089.pdf (arguing that the process for “preparing the Management’s Discussion and Analysis (MD&A) section for a registration statement or annual report . . . is incomprehensible.”).(go back)

44See Letter from the U.S. Chamber of Commerce at 1-2 (Dec. 6, 2023), https://www.sec.gov/comments/s7-10-22/s71022-308399-793602.pdf (noting that commenters have cited to California’s new climate laws and the European Union’s finalized sustainability standards – both issued after the SEC’s proposed public company climate rule – as an argument for and against finalizing a public company climate rule.); Letter from Senators Bill Hagerty and Joe Manchin III at 1 (Nov. 3, 2023), https://www.sec.gov/comments/s7-10-22/s71022-296539-721142.pdf (“[T]he effort to finalize the March 2022 proposal is concerning because recent developments [in California] should compel the SEC to solicit further public feedback on certain assumptions and the economic analysis underlying its proposal.”).(go back)

45The Release explains that companies that must also follow California’s laws could face lower incremental regulatory costs for today’s final rule due to overlapping regulatory requirements. Release at 778. However, the “scope and requirements of the California laws differ from the final rules” and so today’s final rule could instead create additional regulatory costs. Id. at 779. All told, “the extent and overall impact of overlapping disclosure obligations are unclear.” Id. Similarly, the Commission admits to “uncertainty as to the parameters of other jurisdictions’ [climate] requirements,” including Europe’s. Id. at 611. Admittedly, California and the European Union have not yet implemented all the rules at issue. However, commenters still could have helped the Commission developed a more precise understanding of these developments. At least we could have reopened the comment period as we did after Congress imposed a new excise tax on share repurchases. The Commission re-opened the proposal’s comment period to obtain feedback on how the tax altered the proposal’s economic analysis. See Reopening of Comment Period for Share Repurchase Disclosure Modernization, 87 FR 75975 (Dec. 12, 2022), https://www.govinfo.gov/content/pkg/FR-2022-12-12/pdf/2022-26898.pdf. The United States Court of Appeals for the Fifth Circuit vacated our final share repurchase rule. See Chamber of Commerce of United States v. SEC, 85 F.4th 760 (5th Cir. 2023).(go back)

46The vast scope of changes from the proposed rule to today’s final rule is also clear in the drop in overall external cost burden for the typical company. See supra footnote 23.(go back)

47Release at 827, PRA Table 7. This number refers to the external cost burden of filing the Form 10-K.(go back)

48Release at 22.(go back)

49Letter from Andrew Vollmer 1 at 16.(go back)

50The Release states that “although there is significant overlap between the disclosure of climate-related physical risks pursuant to Regulation S-K and the severe weather events and other natural conditions that a registrant identifies pursuant to Rule 14-02, the events covered by Rule 14-02 would also cover severe weather events and other natural conditions that are not necessarily related to climate.” Id. at 485.(go back)

51The inspiration for this question came from the Energy Infrastructure Council’s comment letter, available at https://www.sec.gov/comments/s7-10-22/s71022-20131767-302201.pdf.(go back)