House ESG hearings wrap up – the SEC on the hot seat over climate risk disclosure and shareholder proposals

We have been closely following this month’s House Financial Services Committee hearings on ESG, in what has been styled as “ESG Month.” Last week, as part of that series, the Capital Markets Subcommittee held a hearing entitled “Oversight of the SEC’s Division of Corporation Finance.” The sole witness at the hearing was Erik Gerding, the Director of Corp Fin. 

The principal areas of focus at the hearing were the SEC’s proposed climate risk disclosure rules and shareholder proposals (although these were not the only topics discussed).

Climate risk disclosure rules

This was the most discussed topic at the hearing. In their remarks and questioning, Republicans reiterated their concerns that the SEC’s proposed climate risk disclosure rules will adversely impact capital formation and business health, including the health of small and medium-sized private companies.

A number of Republican Subcommittee members expressed concern about the impact of proposed scope 3 greenhouse gas emissions disclosure on farmers and ranchers. Trade associations and lobbyists for these industries have been especially vocal in their criticism of the proposed rules (in this regard, see our 2022 analysis of comment letter submissions). Republican Subcommittee members also took issue with the SEC’s economic analysis of the proposed rules and the sufficiency of the comment period. Once rules are adopted, these perceived deficiencies will feature prominently in the Administrative Procedure Act challenge.

On the other side of the aisle, Democrats expressed the view that enhanced climate disclosure is relevant to investment decisions since it will better enable investors to understand risk, noting that this information is being requested by a large and growing number of investors. However, one of the Subcommittee Democrats also expressed concern regarding the impact of proposed scope 3 disclosure on farmers and ranchers.

Many clients have asked whether the timing of the SEC’s climate risk disclosures rules was discussed at the hearing. It was not, but we would not have expected timing to be discussed in that forum.  

Shareholder proposals

Republicans also were critical of SEC staff guidance (Staff Legal Bulletin No. 14L) and no-action positions limiting the omission of environmental and social proposals from proxy statements. They also were critical of proposed amendments to Rule 14a-8 that would revise the bases for excluding shareholder proposals (relating to substantial implementation, duplication and resubmission).

In addition, Republican Subcommittee members were critical of proxy advisory firms, focusing on both accountability for the firms’ recommendations and perceived conflicts of interest, as well as 2022 SEC rules that undid rules adopted in 2020 by the prior Republican-majority Commission. Proxy advisors were the subject of a separate July 13 hearing by the Oversight and Investigations subcommittee.

A recurring Republican assertion during the hearing was that proxy advisory firms have been recommending in favor of proposals that would require companies to take actions that are illegal. This also was a topic of discussion at the proxy advisor hearing. Republican Subcommittee members pressed Director Gerding on the Division staff’s assessment of the legality of actions called for by proposals as part of the no-action request review process.

Now that the Committee hearings have wrapped up, the Committee is expected to mark-up and vote on several anti-ESG bills, as soon as this week. Even if ultimately approved by the House, the bills are unlikely to have the votes to pass in the Senate and they will of course not be signed by the President. However, these bills will serve the purpose of further focusing the Republican federal agenda on ESG, which will carry over into future hearings, the next Congress, additional legislative proposals and the agenda of a Republican-led SEC if the Republicans take the White House in 2024.  

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