SEC Withdraws Biden Era ESG Disclosure Rule 

On June 12^th, the Securities and Exchange Commission (SEC) under President Trump withdrew 14 rules initially proposed under the Biden Administration affecting a plethora of financial service actors from investment advisors to fund managers. The agency signaled it would no longer pursue implementing these rules and that if it decided to revisit them, it would do so in alignment with the Administrative Procedure Act.  

This is a commendable move by the SEC as it demonstrates how the new administration is appropriately working to reverse regulatory barriers imposed under Biden.  

The news indicates a much-needed departure from the previous administration’s policy agenda. The SEC is changing course to be substantially less burdensome. It is a welcome shift after years of politically driven rulemaking by the Biden SEC that launched assaults on crypto, investment advisory, and other financial services by taking liberties with its statutory authority. 

One of these rules focused on expanding ESG-related reporting. The SEC’s ESG rule released in 2022 would have required enhanced climate data disclosures for investment fund managers and advisors. The SEC posed its justification in the context of the lack of uniformity over greenhouse gas (GHG) and scope emissions disclosures. 

Scope 1 and 2 emissions typically refer to emissions originating within a company’s supply chain. Scope 3 emissions are indirectly related to a company’s overall emissions and lie outside its direct supply chain, making reporting more difficult. The rule would mandate reporting these emissions for all portfolio companies and relaying the information to investors alongside other typical metrics such as the financial performance and accounting measures traditionally used to evaluate equities and other securities.  

Mandating climate-related disclosures muddles the meaning of data by trying to equate emissions information with relevant and useful information used to project future financial performance. The SEC is wrong to try to mandate ESG disclosures, signaling to investors that such information could be considered a pecuniary factor.  

The nature of this rule not only overstepped the bounds of the agency’s statutory authority, but the justifications and reasoning given were poorly grounded. The SEC acknowledged in the ruling that “some funds and advisers will consider only one issue under the ESG umbrella when making investment decisions, while others will apply the factors more broadly and implement measures across each of the ESG categories. Even those focusing on all three categories will have differing perspectives on what attributes of an issuer or investment fit within ESG.”  

Investors should have the freedom to discern which products align best with their needs and desired objectives. The SEC did not state that there was an issue with investment funds reporting misleading or false information, but rather that funds vary in their preferences for focusing on certain metrics over others. These differences are a manifestation of the free market, contradicting the SEC’s thesis that funds are failing to meet investor needs.  

The SEC also acknowledged within the rule that general disclosure requirements related to GHG emissions already exist. Studies mentioned by the SEC show that over half of the companies in the S&P 500 report scope 1 and 2 emissions, with companies in emission-heavy industries constituting a greater proportion of that category.

If the private sector already responds to investor demand, issuing a blanket rule would be unwarranted and counterproductive. The proposed rule would therefore be duplicative and unnecessary for companies already publishing emissions-related disclosures. 

Even more self-defeating about the SEC’s proposal is that the agency would allow for “good faith” estimates to be taken when accurate data cannot be collected, undermining the entire rationale for the rule to provide accurate, comprehensive environmental metrics to investors. This would have raised the risk of creating inconsistencies during auditing and incentives for greenwashing.   

SEC chairman Paul Atkins should be commended for steering the agency away from forcing companies and funds to divert resources toward meeting nonsensical ESG goals at the expense of unsuspecting workers aiming to retire.  

The SEC should continue to roll back Biden-era rules stifling the financial sector and allow capital markets to flourish by rescinding poorly formed rules that only serve to increase bureaucratic bloat.