Warren, Activists Accuse Sec Of Bowing To Wall Street On Climate Rule

President Joe Biden’s most aggressive financial regulator is used to picking the fights.

Yet Securities and Exchange Commission Chair Gary Gensler is now the one getting dragged into a wave of political and legal battles that he has spent the last two years trying to avoid. And among his biggest antagonists are his longtime boosters — climate activists.

Some of Gensler’s staunchest allies are accusing him of bowing to corporate pressure and scaling back a landmark effort to require thousands of companies to report extensive information about their climate risks.

Sen. Elizabeth Warren (D-Mass.) called the rule the SEC approved on Wednesday the “bare minimum.” She said she’s “deeply disappointed” with Gensler’s decision to ease off on an earlier, far more sweeping proposal that had sparked a backlash by the business lobby, which said it would be too costly and complicated.

Behind Gensler’s decision to pull back on what could be his legacy-defining achievement is both a wariness about an expected rush of litigation and concern that the SEC needed to stay in its lane as a financial regulator and not venture into climate policy.

“What we did today is straight within our remit,” said Gensler, a former Goldman Sachs partner who has been a hero to progressives since his time in the Obama administration, on Wednesday. “We’re agnostic with regard to climate risk. We’re also agnostic on how companies manage climate risk. But we’re not agnostic about disclosure of material risk — and that’s what we’re doing here.”

Powerful regulators like the SEC and the Federal Reserve were once seen by activists as potential cudgels in the government’s fight against climate change. But, as Gensler’s watered-down rule makes clear, financial watchdogs have deep reservations about steering their agencies too far into the thicket of debates over climate policy — even if that means frustrating friends.

After unveiling a pair of climate-related actions last year, the Federal Reserve and other bank regulators drew concern from environmentalists who wanted them to go further. Fed Chair Jerome Powell, meanwhile, told lawmakers on the same day the SEC finalized the rule this week that the central bank is focused on interest-rate policy and that confronting climate change is not its job.

Republicans have complained that Gensler is going beyond his mandate with the rule, but he insists the SEC has no interest in how companies handle climate change. The agency just wants to make sure investors have consistent and reliable climate-related information from public companies.

“He’s an investment banker turned financial regulator, not a climate activist,” a person engaged in Democratic policy circles said of Gensler. “If people were hoping he would use the SEC to set national climate policy, they were always going to be disappointed.”

For years, Gensler has been held up on the left as an ideal regulator. As SEC chair, he has cracked down on hedge funds, private equity firms and the cryptocurrency markets. But the person, who was granted anonymity to speak candidly, said his allure has less to do with progressive politics than his reputation for finalizing slates of rules that can ultimately survive legal challenges.

To be sure, plenty of support has flooded in for the rule, including from Senate Banking Chair Sherrod Brown (D-Ohio), sustainable investing group Ceres and some industry organizations. Even those who wished the agency had gone further such as SEC Commissioner Caroline Crenshaw say it's a step in the right direction. Crenshaw, a Democrat, said during the meeting that this was “not the rule I would have written" but that she voted in favor partly because it moves investors closer to having fuller clarity about companies’ financial risks.

Brown was less equivocal in his praise.

"Climate risk, like any other financial risk, is a threat to Americans' jobs and savings, and to our markets and economy," he said in a statement about the rule, calling it "commonsense" for material climate risks to be required disclosures for companies. "It's clear the SEC responded to feedback from stakeholders and this rule reflects a thoughtful approach to climate risk disclosure."

The SEC declined a request to comment.

But Gensler still finds himself defending the rule to many of the same activists, advocates and lawmakers who paved its way — even as the SEC braces for legal challenges from opponents.

For some, including Warren and Rep. Maxine Waters of California, the SEC effort does not go far enough. Policymakers in Europe, California and elsewhere are plowing ahead with more aggressive climate-risk disclosure rules, they say. Indeed, the SEC, walked back its most controversial plans on companies’ carbon emissions disclosures, for example, dropping reporting on their vast supply chains.

Waters argued that, as a result, the final rule will allow banks and insurers “to continue to stick their heads in the sand about climate risk.”

“Chair Gensler’s proposal falls short of what was expected by investors, advocates and others interested in the future of our planet,” the top Democrat on the House Financial Services Committee said in a statement Thursday.

Environmental groups including the Sierra Club and Earthjustice are considering challenging the SEC over the rule because of the changes. Others are questioning Gensler's own dedication to the effort.

“The writing is on the wall for me with Chair Gensler,” said Clara Vondrich, senior policy counsel for Public Citizen, a consumer group that was among the proposal’s most vocal proponents. “He is just not committed to this issue.”

Gensler told reporters after the vote that the final rule was an outgrowth of the 24,000 comments that the agency received about the proposal. It’s broadly based on the concept of “materiality,” a standard that has guided corporate disclosures for decades and effectively hinges on whether the information in question is significant enough that investors need to know about it. And while the rule may seemingly overlap with other jurisdictions like the EU, Gensler said policymakers elsewhere may have different laws and motivations than the SEC's and what American investors need today.

“It’s important for an agency like ours to adopt rules that we believe are within the law and can be sustained over the long run, rather than do something that is beyond our remit and is going to be overturned in court,” he said.

The SEC has vowed to defend the rule in court.

Former SEC Acting Chair Allison Herren Lee, however, called the idea of trying to limit legal risk by walking back the rule “misguided.”

Conservative judges across the country — including at the Supreme Court — may be expressing more skepticism about agency powers. But Lee, who voted for the original proposal two years ago while at the agency, said “speculation about judicial ideology” shouldn’t get in the way of the SEC’s responsibility to pass a rule that is “optimal” for the markets, driven by data and rooted in the agency’s mission.

“This political dartboard or ‘splitting the baby’ approach — despite still garnering a 3-2 vote — does a disservice to capital markets and to the SEC staff’s depth of expertise and experience,” Lee said.