SEC faces investor backlash over climate disclosure rollback

In 2024, when America’s securities regulator adopted climate disclosure rules, it did so on the back of extensive feedback. All in all, some 18,000 letters and 4,500 comments were received. Pension funds, investor groups, asset managers and politicians. All weighed in.

The SEC is proposing to rescind the 2024 climate disclosure rules. Feedback has come through once again. Pension funds from across the world have written to the SEC, urging the regulator to reconsider a reform they view to be against their interests.

NZI Transition and Climate Investment Conference | 22 October | London | Register here

Statutory authority

The list of asset owners who have written to the SEC include Swedish pension fund AP7, Denmark’s AkademikerPension, NBIM (which manages Norway’s Government Pension Fund Global), Canada’s University Pension Plan, the California State Teachers' Retirement System (CalSTRS) and New York State Comptroller – trustee of New York State Common Retirement Fund – as well as New York City Comptroller.

The SEC’s primary argument in favour of rescinding the rules is statutory authority. “We are proposing to rescind the final rules in their entirety because they exceed the scope of the Commission’s statutory authority”, the Commission says in its explanatory note.

In his response, NYC Comptroller Mark Levine notes this argument seems contrary to the spirit of the prior reform. “The 2024 climate disclosure rules were grounded in the SEC’s statutory mission to protect investors, maintain fair and efficient markets, and facilitate capital formation”, he writes.

In principle, the question of statutory authority could be determined in legal proceedings – if they were to arise. The SEC’s explanatory note takes cognizance of that possibility.

“Even if a court were to find that the Commission had authority to adopt the final rules, we have independent, compelling policy reasons to rescind the rules in their entirety”, the Commission says.

Financial materiality

One of these policy reasons is materiality-based disclosures. The SEC makes the case that existing requirements provide sufficient material climate disclosures, the current regime ‘prioritises’ one among many material factors and citing the case of the EU, the SEC reckons mandating prescriptive climate disclosure has significant flaws.

The SEC’s logic brings the spotlight on the financial materiality of climate disclosures – a topic pension funds have emphasised in their letters.

“We strongly challenge any narrow interpretation of materiality that separates climate risks from core financial performance”, reads a letter signed by New York State Comptroller Thomas DiNapoli.

“Climate risk is financial risk”, affirms the letter sent in from CalSTRS. NBIM’s submission too offers details on how and why climate risk is investor relevant and financially material. Letters from AP7, AkademikerPension and UPP also cover similar terrain.

“Comparable and reliable climate reporting is an important prerequisite for investors to assess risks, make informed investment decisions and contribute to an efficient allocation of capital”, explains AP7’s head of sustainability Charlotta Dawidowski Sydstrand.

Costs and burdens

The SEC’s note also points to the cost factor. Noting that the number of public companies has reduced compared to the early 2000s, the SEC’s note points to cost as a contributing factor.

Climate disclosure rules, the Commission’s argument goes, adds costs and complexity to the companies they apply to. Investors have pushed back against the cost burden argument.

DiNapoli for instance, urges the SEC to consider the costs companies have already incurred towards their planned compliance. A rule change at this point, he notes, would not only put investors in charge of gathering that data but also create conditions for non-comparable disclosures.

Letters from the other pension funds tend to agree. Investors from outside the US also point out an unfortunate consequence of the SEC’s proposal – US disclosures lagging peers.

“Climate reporting by U.S. companies is often less comprehensive and less comparable than reporting by companies in other jurisdictions”, AP7 said in a statement. The SEC’s proposal to rollback climate disclosures would only exacerbate that distance.

Some investors go further to recommend alternative solutions. NBIM, for example, reckons a phased implementation schedule might ease the issue of compliance burdens. Outright rescission, however, is collectively rejected by these investors as a way forward.

Grounded in an investor consensus that climate risk is financially material, investor letters received by the SEC over the past few weeks reflect a palpable backlash against its proposal. Whether or not the regulator takes these concerns into account, remains to be seen.