SEC climate risk disclosure rule faces criticism due to US politicians and farm groups misinterpreting the intent of the regulator, say investor groups.
US politicians on both sides of the aisle have joined forces with farm groups and large companies like Walmart and Tyson Foods that rely on independent farmers and ranchers to pressure the Securities and Exchange Commission (SEC) to exclude agriculture from its proposed climate risk disclosure rule.
Under the proposed rule large companies must disclose emissions, including from their supply chains (Scope 3) where material, prompting opponents such as Senator Jon Tester (D-Mont) to write to SEC Chairman Gary Gensler about the impact of “burdensome reporting requirements” for family farmers.
“As a working farmer, I understand both the importance of considering the impacts of climate change, as well as the importance of access to capital and markets to sell and produce agricultural products,” Tester said.
“However, the SEC should not take any action that may lead, intentionally or unintentionally to burdensome reporting requirements for production agriculture when their goods are part of the supply chain for a publicly traded company.”
The intervention on the part of the agriculture sector comes against a backdrop of fierce political debate on climate- and ESG-related policies in the US, with Republican members of the House of Representatives making clear their intention to use the majority won in the November mid-terms to disrupt to progress of the SEC’s climate disclosure rules and to oppose use of ESG factors in investment decisions.
Republican-run states have also withdrawn funds from major asset managers perceived as putting ESG considerations ahead of the interests of carbon-intensive US industries and consumers.
A big misunderstanding
The pressure on the SEC by detractors is misguided, according to Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets, operated by the Ceres investor network.
The intent from the regulator has never been to go get emissions data from thousands of farms, he says, but asserts there is value in obtaining individual information from the largest 20 or 30 to create an industry average.
The way he and other investors interpret the draft rule from the SEC is that it was never the intention of the regulator to capture the emissions data of every farmer or rancher in the supply chain.
In fact, Rothstein doesn’t even recommend getting individual farm data himself, as the proposed SEC climate disclosure rule is designed to focus on the materially significant information for investors.
“What one farmer does is important to that farmer, but it’s not materially significant to big multinational corporations,” he says.
Based on the Pareto principle, which states that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event, a small number of companies are responsible for the vast majority emissions.
The same is true for the food production and agricultural sectors, says Rothstein, with a limited amount of large suppliers making up the lion share of carbon emissions. And it is this section of suppliers that the SEC intends to gather emissions estimates on – not the small farmer or rancher.
Rothstein believes there must have been a misunderstanding by politicians and farm groups, with the regulator focused on trying to capture the largest portion of Scope 3 emissions, which equates to only the top 3% of suppliers.
Bryan McGannon, Managing Director of US SIF, the US Forum for Sustainable and Responsible Investment, agrees that the pressure on the SEC is likely, in part, due to the rule being misinterpreted by some stakeholders.
“There is no obligation [on independent farmers or ranchers],” he says. “The SEC has been fairly straightforward on this; companies do not need to give detail on emissions all the way down their supply chain.”
Despite the clarity, detractors remain concerned. The American Farm Bureau Federation and other agriculture groups have urged the SEC to offer an exemption for farmers, while Tyson Foods and Walmart have told the agency that calculating Scope 3 emissions will pose a considerable challenge.
“For a multicategory retailer to calculate its Scope 3 footprint at scale, it must rely on broad assumptions and unreliable estimates of emissions,” Walmart told the SEC in a letter. “In essence, current Scope 3 calculation involves estimations on top of assumptions that are repeatedly layered to arrive at a falsely precise number.”
In response, Gensler has said the agency will review feedback on the issue and make any “appropriate” changes to its proposal before the rules are finalised in April. However, he is yet to disclose any potential modifications to the rule and opponents have not publicly shared any recommendations on how to fix the problem.
“Strongest rule possible”
The SEC has faced an uphill battle since drafting the original climate disclosure rule in March 2022. The agency is now four months away from finalising its new climate disclosure requirements, but it continues to perform an impressive balancing act that has seen it manage the demands for greater transparency from institutional investors and a legal threat from Republican politicians.
The commission had to reopen it already extensive comment file in October due to a technical glitch and must factor a Supreme Court ruling in June that threatens not only the climate-related disclosure rule but its authority as a regulator. As such, investors expect the SEC to make appropriate changes to the rule before it is finalised.
“There was a very robust comment file [sent to the SEC], and the regulator is obligated to consider all commentary from relevant stakeholders, so it is likely the final rule will look somewhat different from the initial proposal, with Scope 3 emissions one of the most contentious issues for many,” says McGannon.
But he admits that it is anybody’s guess as to what, if any, actual changes the SEC is likely to make between now and April.
“It’s really hard to tell,” he says. “The SEC is doing its job considering all the information, but if Gensler’s intent is to mollify critics, he may roll back on some of the Scope 3 revisions.”
McGannon certainly hopes that Gensler will stand firm, believing “the strongest rule possible is what’s best for investors and its very clear that climate information is financially material”.
Rothstein shares similar sentiments, expressing his and other investors’ support for the SEC’s proposed climate risk disclosure rule and need for consistent reporting and disclosure requirements.
“Investors are unanimous in their support for the recommendations of [Task Force on Climate-Related Financial Disclosures] TCFD and they’re overwhelmingly supportive of many of the other elements in the SEC proposal,” he adds.
“Ninety-two per cent of Fortune 500 companies have some kind of climate and environmental disclosure. It could be on their website, it could be in a report, it could be in a filing, but it’s all different methodologies. So, consistency is important and harmonisation with the international standards is also important.
“Our hope is that in the coming months, the SEC and the [International Sustainability Standards Board] ISSB will finalise their respective rules, and companies will move to implement them – that will make an enormous impact.”