Last Friday as a holiday present to all, the Securities and Exchange Commission’s Office of the Advocate for Small Business Capital Formation issued its 2022 Annual Report to Congress and the Commission. The report included a summary of the SEC’s climate disclosure and “observations and suggestions” from the Small Business Capital Formation Advisory Committee (“the Committee”) on the proposal in relation to small businesses:
- The Committee asks that the Commission consider incentives, rather than penalties, for companies that are providing climate-related disclosures. Companies that are moving in the direction of doing things that are more climate-friendly may, for instance, be deterred from putting together an analysis due to concerns of having to disclose it before it is finalized or concerns of being required to provide additional disclosures that could be financially costly and time-consuming.
- The Committee urges the Commission consider how the climate-related disclosure requirements may deter private companies from going public. There should be a pathway for very small companies to become public reporting companies without hiring expensive climate-related consultants.
- The Commission should consider the rule’s impact on small companies that are suppliers or vendors for public companies. To the extent public companies are required to track and provide downstream greenhouse gas emissions, smaller suppliers and vendors that are unable or delayed in providing their greenhouse gas emissions may lose business to larger companies that can provide such metrics. Due to disadvantages arising from lack of resources and smaller operations scale, both small public and private companies may face greater challenges in accessing capital and generating revenue they need to sustain their businesses.
Once again, I think back to the SEC’s conflict minerals proposal wayyyy back in 2010-2012 for my thoughts on these points. I don’t have my heavily marked-up copy of the proposal and final release handy, so I am going off my aging memory.
- There are two components to the first point. Let’s start with incentives. I don’t think it is SEC’s role to provide incentives in this case. As the proposal is a “disclosure only” rule, the market (providers of capital) will create incentives for disclosure that are in addition to complying with a regulatory requirement. The second element of this is the implication that disclosing companies will probably just “stick to the script” of the disclosure requirements and not offer more information than necessary. This is certain to be the case for many companies once a final climate disclosure rule is issued. With the conflict minerals disclosures, most issuers didn’t feel a regulatory filing was the right place to tell an ESG story – they complied with the disclosure requirements and that was pretty much it. There was an overwhelming concern about unintended consequences of expanding language in a filing beyond what was required – especially related to a topic that was outside the SEC’s traditional expertise.
- Concerning point number two, similar arguments were made in relation to the conflict minerals rule. I don’t know if any companies did indeed choose not to go public because of the regulatory burden posed by those disclosures. However, I do know of a small number of instances where issuers chose to abandon – or not pursue in the first place – business opportunities that would subject them to the disclosure. Will issuers be able to avoid final climate disclosure mandates by making business choices? We’ll have to wait and see.
- The third point is interesting and very relevant, but I am not sure how impactful it will be. The Commission’s response to the same arguments made about the conflict minerals rule was along the lines of “we recognize there might be challenges in this regard, but because such suppliers/vendors are outside of our jurisdiction, we can’t consider them in our evaluation and rulemaking.”