Federated Hermes and major US insurer Travelers have backed the Securities and Exchange Commission’s (SEC) proposed rescission of its climate disclosure rules as the market consultation closed on Monday.
The SEC announced its rescission proposal in May, saying the rules exceed the scope of its statutory authority and are “unnecessary and inconsistent” with a registrant-specific, materiality-based approach to disclosure.
The move from Federated Hermes and Travelers put them at odds with major investors including Schroders and Norges Bank Investment Management (NBIM), who advocated for the rules to be retained but amended, and CalSTRS and the New York State Comptroller who opposed the planned pullback altogether.
The $105 billion Travelers said in its response that it felt the final rules “do not eliminate fundamental concerns” raised during the original consultation, and that material climate risks are already required to be disclosed under existing, non-climate-specific rules.
“This approach provides flexibility for companies to tailor disclosures to their unique circumstances while ensuring that investors receive information that is relevant to investment decisions,” continued the response, signed by the firm’s CSO and group general counsel Yafit Cohn.
“Complex, interconnected and highly prescriptive sets of disclosure requirements focused on a specific topic encourage the production of large volumes of information that may not be material to investors and may obscure information that is.”
Federated Hermes also supported the rescission proposal, noting that existing securities laws and disclosure requirements “already provide an appropriate framework for companies to disclose material climate-related risks and opportunities based on their specific facts and circumstances”.
The firm also said that requirements which “impose significant costs while producing limited decision-useful information” can harm both issuers and investors, and reduce the competitiveness of US capital markets.
The Federated Hermes’ response contrasts with a submission by its stewardship arm, EOS. While falling short of opposing rescission, EOS warned that a “balance needs to be struck to best support the common goal of risk-adjusted returns and value creation for all stakeholders”.
It agreed that there are opportunities to eliminate redundancies and streamline certain requirements, but rescinding the rule entirely would mean investors would continue to incur additional costs to “obtain, estimate and reconcile fragmented information”.
Slimming support
Other large investors identified opportunities for further streamlining of the rules, but stated that they should not be ditched entirely.
Schroders said in its response that the cost concerns raised by the SEC are legitimate, with the burden falling most heavily on smaller registrants, but advocated for retaining “at least a streamlined core” of disclosures.
These should be centred around material climate risk, materiality-qualified Scope 1 and 2 emissions, and simplified governance disclosures, which are already made public by almost all of the largest registrants, and at least two-thirds of in-scope firms.
Mandatory requirements in this area, Schroders said, would standardise existing practice rather than create new burdens, and would not discourage companies from going public.
Similarly, NBIM said it recognised alternatives that would address concerns about the scope and cost of the rules while preserving an investor-relevant baseline.
It suggested phased implementation, proportionality measures and closer alignment of the rules more closely with international standards to reduce duplication and increase US firms’ international competitiveness.
The interoperability question was also addressed by the International Corporate Governance Network’s response. It said the SEC should consult on proposals for targeted amendments including interoperability or substituted compliance for substantially equivalent reporting under the International Sustainability Standards Board or other recognised regimes.
Investor pushback
However, other investor responses pushed back against the SEC’s proposal.
They argued existing corporate disclosures do not address investors’ information needs, with the variety of regulatory regimes leading to a fragmented landscape without a US baseline, and the lack of standardisation driving higher costs.
Investors also pushed back against the SEC’s arguments that the rules go beyond its authority and are inconsistent with a registrant-specific, materiality-based approach.
In the New York State Comptroller’s response, Thomas DiNapoli said the Commission’s rationale of corporate compliance cost savings “entirely ignores” how much investors and companies have already invested and planned based on the expectations of a uniform federal standard.
“Abandoning the rule now penalises those companies that proactively planned while improperly shifting the economic burden of data collection to investors, many of whom cannot assume that cost,” DiNapoli said.
“The resulting vague and non-comparable disclosures may ultimately compromise investor protection and degrade the efficiency of our capital markets.”
Meanwhile, CalSTRS said without the rule “investors will continue to face the same chronic data deficiencies” that it laid out in a previous comment letter.
For example, the Californian pension giant said it currently spends approximately $2.2 million per year to access climate research and develop methods to estimate climate risks for assets across its portfolio.
“Approximately 60 percent of the climate data we rely upon remains estimated by third-party research firms rather than reported directly by companies. Mandated disclosure would reduce this costly reliance on inconsistent estimates.”
Earlier responses from fellow asset owners CalPERS, AP7 and the New York City and Maryland comptrollers also raised cost concerns.
Boston Trust Walden’s submission noted that US companies are increasingly compelled to provide climate risk-related disclosures in other global markets.
“The lack of a US federal regulatory disclosure mandate could result in information asymmetry across capital markets, increasing US companies’ cost of capital,” it said.
“Higher costs of capital may impact future returns, stock value and other financial metrics, negatively impacting the individual company and its shareholders.”
Other investors to oppose rescission include AkademikerPension, Vancity Investment Management, Impax Asset Management and Miller/Howard.
Aegon UK’s submission concluded: “High-quality, standardised climate disclosure serves every element of the commission’s mission, namely protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.”