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The SEC’s new rules will require companies to be more transparent about their greenhouse gas emissions and the climate-related financial risks they face. (Photo: Richard Bett, Flickr, public domain)
Climate disasters, adaptation costs, and market shifts threaten the value of public companies that are poorly prepared for climate change. So the Democratic-controlled U.S. Securities and Exchange Commission recently approved rules requiring public companies to notify investors about their greenhouse gas emissions and climate risks. Vermont Law School Professor Emeritus Pat Parenteau joins Living on Earth’s Steve Curwood to discuss the rule and the pushback from industry and some Republican-led states.
transcript
O’Neill: Living on Earth, I’m Ainsley O’Neill.
Doering: I’m Jenny Doering.
During the Great Depression, President Franklin Delano Roosevelt signed the Securities Exchange Act of 1934 to protect U.S. financial markets from collapses like the Wall Street Crash of 1929. That was decades before scientists alerted the world to the problem of climate change. It is very expensive, creating new financial risks. Climate disasters currently cost the United States approximately $100 billion each year. Additionally, adapting to rising sea levels, extreme heat, and hurricanes will require significant and costly upgrades to infrastructure and buildings. The climate emergency requires a rapid transition to cleaner energy, creating new economic opportunities, but also reducing the value of fossil fuel assets. So the financial regulator created by FDR recently approved rules requiring publicly traded companies to notify investors about their greenhouse gas emissions and climate risks by 2026. All three Democrats on the Securities and Exchange Commission voted in favor of the climate change disclosure rule, while their two Republican colleagues voted against it. The fossil fuel industry immediately pushed back against the rule, filing multiple lawsuits with the help of conservative states that led to a temporary injunction by the Fifth Circuit Court of Appeals. The opposition is part of a broader Republican challenge to the right of government agencies to regulate the environment, from protecting fragile wetlands to setting air pollution standards. Pat Parenteau, professor emeritus of Vermont Law and Graduate School, explained the SEC’s rules and objections with Living on Earth host Steve Curwood.
CURWOOD: So what exactly is this SEC rule and what does it entail? And why is it such a big deal?
The SEC recently rescinded its Scope 3 emissions disclosure requirements. Scope 3 emissions refer to greenhouse gas emissions by end consumers, such as when people burn gasoline in their cars. (Photo: Eric MacLean on Unsplash)
Parenteau: Yes. For the first time, companies will be required to disclose their greenhouse gas emissions and plans to address the threats and financial risks posed by climate change, including physical risks to their assets and businesses. It will be. facilities, transition risks (as we are transitioning from fossil fuels to new forms of energy and transportation), liability risks, litigation brought by states, counties, and cities across the country and even around the world, and reputational risks. risks etc. This regulation therefore requires these companies to know what their emissions are and what they are doing about it, how much they are spending on it, and how much it is worth. This will be the first time that we are communicating that we need to be more frank about this. Assets advance, etc.
Curwood: So why is the Securities and Exchange Commission (SEC) allowed to do this? If you look into it, it seems like it targets publicly traded companies. But what is the basis for regulating this?
Parenteau: Well, the rationale is that we need to make sure that investors have accurate information about the value of the companies they invest in and the financial risks they face. Opponents of the rule argue that it is simply climate or environmental policy. The SEC says no, because it involves financial risk. So the real question becomes whether the SEC is within the powers given to it by Congress since his 1930s when the Securities and Exchange Commission Act was passed.
The new rules immediately faced legal challenges from the fossil fuel industry. (Photo: AP, Pexels)
CURWOOD: So this is going to be decided in court, but the SEC has the right to question whether these companies are going to survive in light of the climate emergency. Some people might think so, right?
Parenteau: Yes. And in fact, this isn’t the first time the SEC has tackled both environmental issues in general and pollution risks and liability, such as oil spills that can have serious multibillion-dollar consequences. This is not the first time the SEC has issued guidance on climate risks. This is the first time the government has actually adopted legally enforceable rules with penalties for violations. So while this is definitely more advanced than the SEC has been in the past, it’s not entirely new.
CURWOOD: Well, as this rule was being put together, there were a number of things that ended up being published, what changed, and things that were removed from the proposed rule. By the way, how does that compare to what’s happening in Europe and what’s happening in California?
Compared to the new SEC rules, California, the world’s fifth-largest economy, has stricter emissions disclosure requirements. (Photo: Peter Miller, Flickr, CC BY-NC-ND 2.0)
Parenteau: Yes. In other words, the proposed rule would go so far as to require disclosure of emissions associated with a company’s supply chain and consumer end-use. That’s us, right? People who go to gas stations and fill up with Exxon or BP or Shell or whatever. This is called Scope 3 emissions and accounts for the largest proportion of emissions attributable to these companies. But it’s very difficult to evaluate and quantify them because we’re talking about literally millions of consumers using these products. As a result, the SEC has withdrawn the disclosure requirements for these so-called Scope 3 emissions. You mentioned that companies are already subject to more stringent disclosure requirements than what the SEC has proposed for companies doing business in California. This also applies to companies that conduct business. The union imposed even stricter disclosure requirements. So in many ways, this is nothing new for these companies. Either they are doing it, or they are being asked to do it in some other context. The SEC did several other things to water down the final rule. One is to increase the number of companies that are exempt from disclosure requirements. So they currently focus only on the world’s largest publicly traded companies. Companies were also given the option to determine whether the risks from climate-related disasters were material to them. This introduces a sort of wildcard into the equation, where individual companies need to decide: Do you believe the risks to your business plan are significant enough to be disclosed to the public?
CURWOOD: Wow, I think this is like giving the fox the key to the chicken coop.
Parenteau: Yes. Correct the fox and make sure the chickens are all safe. Because there’s oversight, once a decision is made, are companies acknowledging that they’re facing some material risk, or are they being told by the SEC, you know, the level of threat from emissions, physical impacts? will be calculated. For climate change, such things need to be independently verified. This would introduce yet another level of analysis to prevent investors from investing in truly risky assets. Risk of Stranded Assets. Unless companies start seriously transitioning away from fossil fuels, many of the assets on their books will become stranded assets and investors will be left holding the bag.
Curwood: Stranded assets such as undeveloped oil fields that can never be used.
Pat Parenteau is Professor Emeritus of Law at Vermont Law School and previously served as Regional Counsel for the EPA. (Photo: Courtesy of Vermont Law and Graduate School)
Parenteau: Yes.
CURWOOD: Pat, as soon as this rule was filed, there were lawsuits filed by the industry as well. And we heard that one of those cases was heard by the Fifth Circuit Court of Appeals, which granted the motion to uphold the rule. What is the practical impact of these cases? And ultimately, what does how the courts respond to the “fuck it” statement say about the ultimate fate of this rule? Do you think?
PARENTAU: Well, there are lawsuits going on right now in six different appellate courts in the United States. Republican attorneys general from 13 states filed these lawsuits. And while the Fifth Circuit, currently the most conservative court in the country, may claim that the Supreme Court itself is the most conservative, it is certainly the most conservative of the appellate courts. The Fifth Circuit favors the industry, particularly oil exploration, and is located in New Orleans, Louisiana, and has ordered a stay of SEC rules. A single line of command, no explanation given. This facility, located near the 5th Circuit, has only been around for a very short time. Therefore, its practical effect is limited. Because what’s happening now is that there’s a special committee that’s going to draw lots to determine which of these six circuit courts that these cases are pending in will actually hear the cases. Maybe it’ll be the 5th Circuit, maybe it’ll be one of the other circuits. I don’t think the cease and desist order says anything about whether this rule will continue. Additionally, there are those outside the SEC who challenge this rule, arguing that it is authoritative. There are also environmental concerns, and the SEC argues that it erred in removing the requirement to account for these so-called Scope 3 emissions. The case is pending in the D.C. Circuit Court of Appeals. and the Second Circuit Court of Appeals. Both of these circuits have a majority of judges appointed by Democrats, while the other circuits have a majority of judges appointed by Republicans. So we see politics playing a role in the ultimate fate of this rule itself, even in the context of where this case will be heard and who will hear and decide it.
DOORING: That’s Pat Parenteau, professor emeritus at Vermont Law School, speaking with Living on Earth host Steve Curwood.
Note: After recording our interview, the Eighth Circuit Court of Appeals was designated as the court to hear the challenge to the SEC rules.
Link
Learn more about SEC hiring rules
Reuters | “U.S. climate change regulations boost sustainable accounting industry”
wall street journal | “U.S. Court of Appeals suspends SEC climate change disclosure rules”
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