SEC Climate Risk Proposal Under Attack From Banks, GOP Lawmakers

June 21, 2022
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The American Bankers Association and a group of 131 Republicans have called for the Securities and Exchange Commission (SEC) to withdraw altogether its proposed climate risk disclosure framework.

The American Bankers Association (ABA) and a group of 131 Republicans have called for the Securities and Exchange Commission (SEC) to withdraw altogether its proposed climate risk disclosure framework.

The ABA has said the SEC’s climate risk disclosure requirements “go far beyond the SEC’s mandate to protect investors”. It urged the agency to withdraw the proposal and instead adopt a principle-based framework.

The banks’ lobby group argues that the proposal in its current form essentially treats climate risk as a material risk whether of direct interest to investors or not, which could lead to “inappropriately” reallocating capital and investment away from emission-producing sectors of the economy.

“Efforts to reduce greenhouse gas emissions, as desirable as they may be to address climate change, must be effectuated by Congress, and not mandated or otherwise directed through a regulatory agency without an explicit environmental mandate,” the ABA wrote.

It warns that the SEC proposal would apply to a much larger group of financial institutions than other regulatory proposals. In addition, it is “far more prescriptive” in relation to governance and risk management than rules proposed by federal banking regulators, such as the Office of the Comptroller of the Currency (OCC) or the Federal Deposit Insurance Corporation (FDIC).

For example, the US banking regulators have proposed climate-risk management principles only for institutions with greater than $100bn in assets. The SEC proposal, however, would require a much larger group of SEC registrant-banks to implement climate risk management and governance processes, which may sometimes include community banks with $3bn to $5bn in assets.

“We urge the commission to reconsider its approach in favour of one that is principles-based and scalable, based on a variety of factors, including the size of the entity, where it does business, the industry it is in, how its products or services fit into its value chains and the climate risks it faces,” the banks’ association says.

“Only with this flexibility will new, prospective, and existing registrants be able to comply without significantly impairing their ability to compete in the marketplace.”

Time needed

Given the nascent state of climate-related financial risk management, the ABA is also pushing for a more extensive safe harbour, which would protect businesses against private litigation in relation to certain statements they make in their documents. This would encourage honest discussion, according to the lobby group.

It pointed out that there are significant gaps in climate risk-related data and only a limited number of experienced personnel in climate-related financial risk management.

Banks would probably need more time to submit the necessary data as they would be required to look at granular loan-by-loan data and it will likely take years before they can obtain sufficient internal control and reliance on the third-party databases.

“Without an expanded safe harbour, candid conversation will not occur, and boilerplate language will be the norm,” the ABA stressed.

Some of these arguments were raised by Republican members of Congress on the same day, albeit with more loaded language.

In a letter sent to SEC chair Gary Gensler, Patrick McHenry (R-NC), the top Republican on the House Financial Services Committee, and 130 fellow-GOP lawmakers called on the agency to rescind the proposed rules “immediately”.

Although the SEC traditionally took a well-functioning principles-based disclosure regime, they say the proposed climate rules “shift the SEC's rulemaking authority, taking a novel, activist approach to climate policy”.

“It is Congress' job to set our environmental policy, not the job of unelected regulators."

“The SEC should focus on its core mission-protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation rather than a far-left social agenda,” the members of Congress wrote.

The ABA’s comments and the GOP letter were sent to the SEC as part of the agency’s extensive climate risk disclosure proposal that would require public companies to provide detailed reporting of the climate-related risks, emissions and net-zero transition plans.

Meanwhile, the other main federal financial regulators are also looking at ways to help financial institutions manage their exposures to climate-related financial risks and mitigate those risks.

Last December, the OCC proposed principles for climate-related financial risk management for large banks aimed at ensuring the safety and soundness of banks.

At the end of March, the FDIC released draft principles to establish a high-level framework for large banks, while earlier this month, the Commodity Futures Trading Commission (CFTC) requested information about climate-related financial risk in relation to the derivatives markets and underlying commodities markets.

The Federal Reserve, although it has not proposed any rules yet, confirmed it is developing a programme of scenario analysis to evaluate the potential economic and financial risks posed by different climate outcomes.

All of these efforts are built on an executive order signed by President Joe Biden last May, which directed the secretary of the Treasury, as the chair of the Financial Stability Oversight Council (FSOC), to consider how to combat climate change, especially as it affects the financial sector.

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