Daniel E. Walters, Penn State and William M. Manson, Penn State
The U.S. Securities and Exchange Commission released its long-awaited proposal to require companies to disclose their climate risks to investors, and it’s arguably the most significant action on climate change yet under the Biden administration.
SEC Commissioner Allison Herren Lee called it a “watershed moment for investors and financial markets.” It is also a win for President Joe Biden, whose other climate efforts have struggled. A year ago, Biden appointed an SEC chairman, Gary Gensler, who supports climate disclosures in principle.
The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, simultaneously strengthening both markets and the nation’s climate response.
But the proposal has a long way to go before it can make the transformative changes it aims for. We study climate regulation and business law and have closely tracked debates over the proposal. Here’s what you need to know.
What the rule would do
If the SEC votes to finalize the rule after a public comment period, it would standardize, extend and mandate disclosure requirements that the SEC encouraged in a guidance document back in 2010.
As the 510-page notice released on March 21, 2022, makes clear, companies would be expected to include a laundry list of items in their regular filings with the SEC: information on the company’s “oversight and governance of climate-related risks,” any expected climate-related risks it faces in the future, any transition plans the business has developed, and data on certain greenhouse gas emissions linked to the company’s operations, among other things.
Gensler said the proposal draws from the approach of the Task Force on Climate-Related Financial Disclosure, which several countries have adopted. But the proposal is still noticeably less stringent than the European Union’s regulations.
In the leadup to the release of the SEC’s proposal, supporters and opponents speculated about whether so-called Scope 3 emissions would be required. Under the terms of the proposal, the answer is a resounding “maybe.”
A company’s Scope 3 emissions result from activities of third parties, such as the emissions produced by its suppliers or, ultimately, by its consumers. As the SEC pointed out, these emissions can “represent a majority of the carbon footprint for many companies.”
While all registered companies would be required to disclose their own direct greenhouse emissions, such as emissions from manufacturing processes, as well as indirect emissions through the use of energy – Scopes 1 and 2, respectively – only some companies would need to report Scope 3 emissions under the proposal.
The proposal would exempt “small reporting companies” from Scope 3 reporting. It would allow large companies to withhold Scope 3 emissions data when the company determines that the data are not “material” to investors or if the company doesn’t have Scope 3 emissions targets or goals.
Public interest groups wanted the SEC to require disclosure of even non-material Scope 3 emissions, while industry groups pushed for the SEC to forgo any Scope 3 emissions mandate. The SEC appears to have split the baby.
It’s not over ‘til it’s over
The SEC’s proposal initiates what can be a perilous process of public vetting before the rule goes into effect.
First, the SEC will take public comments on the proposal for the next 60 days. The agency received about 600 unique comments in its request for information before issuing the proposal. Now, with more details available, there should be substantially more engagement. When the Federal Communications Commission took public comment on its proposal to roll back net neutrality rules, it received almost 22 million comments.
The SEC should expect to receive extensive comments both from opponents of any regulation and public interest groups that want more stringent regulations.
Under standard administrative law principles, the SEC must consider and respond to any important arguments or data presented by public commenters. If it gets even a fraction of the comments the FCC got, this process could easily take half a year.
By design, this process is supposed to allow the SEC to change the terms of the proposal, although it cannot change the proposal so much that the public would not have understood during the comment period what the final rule would do.
The courts lie in wait
Now that the terms of the proposed rule are in place, it is easier to see where legal vulnerabilities might be.
Industries are likely to take issue with the SEC’s estimates of the costs companies will face to comply with the rules. The SEC’s proposal states that the cost could be “relatively small” if companies already provide similar information. The SEC will have to defend that assertion carefully.
In 2011, the U.S. Court of Appeals for the District of Columbia threw out an SEC rule on the grounds that it failed to adequately consider economic costs of compliance. Although that ruling has been widely criticized for imposing a cost-benefit analysis requirement that is not required by law, the U.S. Supreme Court seems sympathetic to such a requirement.
Another vulnerability will stem from the SEC’s approach to Scope 3 emissions.
Both industries and public interest groups are likely to argue that the SEC misunderstood its statutory authorization – either because it included Scope 3 emissions or because it believed it was limited to “material” emissions, respectively. Or challengers could argue that SEC failed to fully analyze policy considerations favoring a different approach. How well the SEC responds to critical comments will be important when the courts are asked to decide if the SEC acted in an arbitrary or capricious or unlawful manner.
Finally, it is possible that the matter is out of the SEC’s hands. Some critics have suggested that the regulation of climate disclosures is too important a question for regulators and belongs with Congress. Courts have sometimes shown skepticism toward agency actions that present so-called “major questions,” including those related to climate change.
If the courts view climate disclosure as a major question, they may vacate the rule even if the SEC has strongly supported its approach.
A long way to go
The SEC has taken a major step that could boost the Biden administration’s climate change agenda, but whether it will be able to navigate a treacherous administrative and legal process without changing its approach remains to be seen.
The notice of proposed rulemaking is usually just the opening offer in an ongoing negotiation over the rule.
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Daniel E. Walters, Assistant Professor of Law, Penn State and William M. Manson, Law Student, Penn State
This article is republished from The Conversation under a Creative Commons license. Read the original article.
A ‘climate risk’ that does not exist. Can you imagine the damages litigation once that truth gets out in the open?
“A ‘climate risk’ that does not exist.”
This is my concern exactly.
In US Govt. land, “climate risk” will be defined as the “projections” made by the climate models. Just wait for this regulation or finding to land with a thud.
At the end of the day SEC is forcing the model projections to have the force of law. Comply or else.
This is a govt. agency run amok.
Politicized Deep State.
re: “once that truth gets out in the open?”
How’s that going to happen? With “modern journalism” in vogue?
Heck, they are still covering up the Hunter Biden lap top story, even though it can’t hurt the Big Guy anymore.
Excellent quote. I love it.
Every corporate SEC filing will be fraudulent automatically since those filings will be based on a risk that is fraudulent.
Everyone will point their fingers at everyone else: Nobody will be held accountable. There could, however, be political consequences.
This will be an absolute and colossal waste of time earning countless fees for professional services firms whilst achieving sweet FA, not least because the figures will be wild guesstimates based on fabrications and won’t matter anyway. Will Chinese, Indian, Russian or African firms bother with any of this? Will they hell.
This is a classic example of the western world (be in no doubt that if this all becomes compulsory in the USA, the likes of the EU and the UK will rubber-stamp it) tying its businesses up in time and cash-intensive regulatory knots whilst the rest of the world laughs and takes the business.
Sometimes, Ian, it’s possible to be too cynical.
But in this case, I believe you aren’t cynical enough.
Could it be that, like for most regulations, big business will welcome these regulations because it would tend to stifle competition? Additionally, as indicated earlier there is lots of profit opportunities for crony capitalists.
Is that the same “absolute and colossal waste of time” that the climate change movement has inflicted in every sphere of its undertaking? Yet another mutation of the climate change virus with an R0 of about 100. China, India, etc are looking like the survival of any companies. Maybe that was always the plan?
This rule will never see the light of day.
“This rule will never see the light of day.”
The US govt. has turned us in Regulation Nation, and continues spewing out more regulation at an ever faster rate.
There is no end in sight. I hope you are not willing to bet real money on that proposition.
The Federal government has numerous checks and balances, including Congress, which has enacted no such climate risk requirement in law, and the courts up to and including SCOTUS, which in case you didn’t notice, has a 6-3 majority of conservatives over liberals. There is always an ongoing struggle for power and control, but if it’s 1-2, the executive branch will lose this battle. They’ll keep fighting as long as they can, but the Congress is not going to enact any such legislation, and when the rule gets to SCOTUS it will be knocked down because it exercises an administrative power that does not exist.
SCOTUS has a 6-3 conservative majority? That must have happened after all of the cases regarding the 2020 election……..sarc off.
Bottom line is the regulatory arm of the ruling class has too much support from the rest of the ruling class to fail. Big corps will get bigger and more small businesses will get whacked
Stranger things have happened. Like a Supreme Court nominee not being able to define what a woman is because she’s not a biologist.
My cynicism says, “wait and see.”
Yeah – what’s a ‘woman’ again?
SCOTUS will strike the rule down, whenever it gets to them. Likely lower courts will also strike it, but SCOTUS, with its 6-3 conservative majority, will be the final word.
All very nice, but isn’t it incumbent on the SEC to justify the imposed cost of compliance by proving that “carbon emissions” do, in fact, have a measurable, definable negative impact on climate? (It would have to be measurable if investors are to rely on reported numbers to decide on trades.) And, HEY, S.E.C.! What about my TRADE SECRETS?! Am I required to report on the Scope 3 impact of an important ingredient in my product whose very existence is legally withheld from the public as a trade secret? As outlined, all trade secrets would be subject to discovery. Which, actually, is fine with me. I’ve always wanted to know what’s in that vault in Atlanta at Coca Cola.
“All very nice, but isn’t it incumbent on the SEC to justify the imposed cost of compliance by proving that “carbon emissions” do, in fact, have a measurable, definable negative impact on climate?”
I think the SEC skipped this part. They are operating on assumptions, not facts, when it comes to CO2. There’s no evidence there is a negative impact from CO2.
Corporations should point this out and make the SEC prove their case against CO2. Corporations should say to the SEC: What damages from CO2? Prove there are damages from CO2 before we go any farther. Regulating before the facts are in, is putting the cart before the horse.
In the past courts have determined that Deep State entities determine what the facts are. Remember the EPA Endangerment Finding?
Here in the UK we import a lot of goods from China, no surprise I hear you chorus.
It seems the government now have the opportunity to put a Scope Three Tariff on all imports from China, because they are dirty little carbon polluters. What’s not to like for the tax office.
Whilst they’re at it, what about tarrifs on Indian goods and everywhere else that uses carbon fuels……like Germany.
Yes folks, just when you think they can’t put the cost of living up, they do…_
Good point Digger but just how in god’s name are the accounting firms/the government/HMRC etc going to be able to assess the totality of “emissions” (which I assume means CO2 emissions) of companies in a place like China? Are the Chinese going to carry out similar, meticulous audits then tell us accurately and truthfully what we are desperate to know? No chance! Will the likes of the Chinese seek trade-related retribution if we impose these kinds of “carbon taxes”? Every chance.
The whole scenario is absurd and would be really funny if it wasn’t so potentially damaging for western businesses.
“Here in the UK we import a lot of goods from China”
Because…. it lowers our ’emissions’ and raises China’s.
Scotland chose to get its wind turbines not from a local yard, but from China.
Scope 3 /upstream emissions- Purchased goods?
My oh my won’t the Walmarts and Home Depots have an admin problem on their hands with all those Chinese goodies. Mind you they want to be careful what they’re starting here with full ‘carbon cycle’ reporting as the wind/solar/battery and EV sector won’t be exempt.
Then there’s those virtue signalling software peddlers like Messrs Cannon Brookes and his Atlassian et al as they buy some Green power for the rented office space and bobsyeruncle they’re carbon neutral. Not so fast as what about the embedded carbon in the building furniture computers not to mention the comms and power their software users cause?
Then there’s the employees and their carbon footprints for the proportion of their lives they’re at work and getting to and from work to facilitate the whole show. Have to allocate the work proportion of their complete carbon lives dedicated to turning the dark satanic mill here Mikey boy. That includes their power bills and roads they drive on and their cars and homes etc etc etc…..and all that embedded carbon to make it all happen in the workplace?
Be careful what you wish for Greenies as you’re on a slippery slope to opening community eyes as to just how much you want to interfere in everyone’s lives with your accounting practices.
Wait for it: The US Supreme Court has agreed, in late Feb. 2022, to hear arguments in the case “West Virginia versus EPA”, and the hearing will probably be before the Summer recess. West Virginia sued the EPA for imposing Federal Rules against “carbon pollution” associated with the US power generation sector. This review and ruling might be the first, and hopefully only, real trial regarding anthropogenic carbon in the earth’s climate cycle. The ruling should be a consideration in the proposed SEC Scope 3 nonsense.
I admire your optimism, but any court that could find the compulsory purchase of insurance to be Constitutional is to be greatly feared.
This Court wouldn’t have found that. Ginsburg is gone.
Yes, but some of the newcomers are suspect.
The one that is about to join the court has given every indication that she couldn’t care less what the law or the constitution say, she will rule based on what she feels best advances her view of “justice”.
She will do exactly as Ginsburg did. She will vote as if she were controlled by the DNC.
It might rain. It could be a sunny day, a cold day, a warm day, a windy day ad nauseam.
They’d be romping home with this claptrap – on every propaganda outlet – had the Russians not thrown a spanner in the works.
This is how the West dies…over regulation 😔
“The (virtual) slavery of the bureaucracy.” Congress has abdicated their duty, their responsibility.
This is going to generate a lot of MSU (Make Stuff Up) reporting. The companies will assign it to someone in the mail room to fill out after they have made their rounds.
In my preretirement life, we received goods accompanied by a ‘Certificate of Compliance’ which (heck! I can’t even remember what it was that was being certified… some EPA thing as I recall) was filed in some drawer as soon as it came in. At the end of the year, the certificates were put in a box. At the end of 7 years, the box was thrown out.
No one ever looked at those certificates**. We couldn’t know or say if the supplier was in compliance anyhow.
As fill-in work, our receptionist printed up our ‘Certificate of Compliance’ for us to include in our shipments.
As I recall, we looked into it at the beginning of the requirement and decided, “It looks like we’re good.” None of our customers ever called with questions or came around to audit that we were actually complying with whatever it was we were certifying.
If it comes to pass, this new requirement will be a bunch of, “We can’t determine for certain, but to the best of our knowledge, we estimate it is [some made up number],” and that will be the end of it.
If I’m understanding this correctly, there’s no penalty for whatever the number is. A company just has to report the number. So, they’ll report a number that gets changed slightly every year by something that looks reasonable. It’ll be “To the best of our knowledge,” anyhow.
**I wish I could remember what they were about. It was that goofy and trivial, but it was required, by golly.
‘The companies will assign it to someone in the mail room to fill out after they have made their rounds.’
Most oil companies and fossil fuel-based power producers, both the intended targets of this exercise, could probably assign the determination of their ’emissions’ to a summer intern possessing a basic knowledge of chemical stoichiometry. The problem is the downstream sturm and drang for the requisite climate impact. Unless the Feds standardize something here, these would be all over the map.
As far as the downstream numbers go, no one can say for sure. The SEC isn’t going to check the numbers.
As you point out, it would be devilishly difficult if not impossible to figure all of that out.
This is a cudgel to be used by the Green Blob. They will sue in the manner of “Exxon Knew” saying the company’s numbers are wrong.
I’m no lawyer, but I’d think that a company under lawfare attack could just say that they stand by their number and demand that the greenies show where they are wrong and what the number should be. If it’s impossible for the company to work up the number, then it will be impossible for the greenies.
And if the process is the punishment, then maybe companies can work it so the greens have to go through the process, too. They won’t.
I dunno. It certainly would be best to str@ngle this onerous, useless regulation in the cradle.
The problem is that the greenies have deep pockets and can sue over and over and over again. It doesn’t matter how many times they lose, just forcing the other side to spend money until they are forced into bankruptcy has always been the goal.
Audits and enforcement will be, entirely, based upon the level of green toadying, political bent and donations of the company at large and, and what the company produces and whether the product or services are considered ‘EVIL’ or not.
Audits will not be done by the SEC but by green NGO’s who will present cases, fully formed and investigated, to the SEC.
I hope this opens up the possibility of challenging the assertion of a link between CO2 emissions and global warming/negative climate effects. You know, truth as a defense.
The problem is that all the government agencies swear by “dangerous” climate change. They’ll just trot out UN IPCC and U.S. National Climate Assessment reports to justify their positions. Courts have been unable to get into the weeds.
Courts in the US will accept Federal Government Agency “data” as truth.
True, but IIRC one or more recent cases rejected the old “deference” rule. If a plaintiff can show an agency is “cooking the books” they might have a good chance; dueling experts, ya know.
While it will be a long and torturous path to get there, it seems highly unlikely any SEC rule intended to force warmunism as policy without specific Congressional authorization in law can survive SCOTUS review given its current makeup.
Policy is supposed to be set by Congress – that is its job under the Constitution. The executive branch’s job is to administer and enforce laws established by Congress. Of course for the last 90 years the Federal executive branch has overstepped its legal bounds repeatedly, oftentimes forced to retreat by SCOTUS rulings, but it takes a long time to go through that process.
“Of course for the last 90 years the Federal executive branch has overstepped its legal bounds repeatedly, oftentimes forced to retreat by SCOTUS rulings, but it takes a long time to go through that process.”
I’d change the word ‘oftentimes’ to ‘sometimes’, or better yet, ‘on extremely rare occasions’. Otherwise, you’re spot on.
Literally hundreds of administrative rules have been struck down by the courts, going back centuries. Go look up “Roosevelt court packing scheme” for something that happened in the 1930s. The reason FDR sought to pack the court was because it was repeatedly striking down his New Deal programs and rules. It’s certainly been going on ever since Madison v. Marbury back in1803.
There are tens of thousands of pages in the CFR, so ‘literally hundreds’ translates to ‘extremely rare’ in my book. As to FDR, the Court did a 180 on its resistance to the New Deal in the Carolene Products case. The most egregious aspect of that ruling was the infamous ‘Footnote 4’, which basically states that anything the Feds do to us, economically speaking, is A-OK with the Court.
Hanging a number on emissions – primary and tertiary sources – is not identifying risk. It is requiring firms to 1) Wear a red letter for public disapproval, and 2) Establish a basis for government interference in the business – akin to a forced confession prior to being sent to Siberia..
‘…it would standardize, extend and mandate disclosure requirements that the SEC encouraged in a guidance document back in 2010.’
Gee, I wonder whose administration that was?
The “deep state” and all those individual persons making up said deep state exist, enjoy employment bridging administrations, the bureaucrat class, who answers ONLY to itself. Appearances before congress, of the various department heads, are only for show … AND, I’ve got to believe, there are always those ‘eager beavers’ bucking for a promotion via various means, be that brown nosing or ‘dreaming’ up various enforcement schemes and regulations to achieve those ends.
Studies show over 90% of those embedded in the Deep State vote Democrat.
Well, there is one good thing about it, if it ever gets accepted and makes it through the courts. observa touched on it above when he said:”Mind you they want to be careful what they’re starting here with full ‘carbon cycle’ reporting as the wind/solar/battery and EV sector won’t be exempt.”
If/when the wind and solar manufacturers comply it should only take a few simple calculations to determine just how much CO2 is generated in the manufacture of each turbine/solar panel and from there how much will be save during use (either plus/minus).
I have a sneaking suspicion that they’ll both come out negative.
They won’t technically be exempt, but if there is nobody out there willing to enforce the law, what difference will it make? Who’s going to sue them if they put out phony numbers?
Ummmm … what I want to know is – WHY didn’t they (the SEC) catch Madoff? Bernie Madoff, who ‘made off” with a LOT of other people’s money through fraudulent schemes … where was the SEC when THAT was going down? They even had folks, other analysts SHOUTING hints and demonstrating that Madoff could not POSSIBLY be earning the ‘returns’ he showed, yr after yr …
Please, DON’T tell me that they (the SEC) is *just* another mostly useless federal agency, existing only to act as an ‘agent’ of the ‘party in power’, IOW, starched ‘white shirts’ mirroring the ‘brown shirts’ (BLM anyone?) marching in the streets …
‘Ummmm … what I want to know is – WHY didn’t they (the SEC) catch Maddoff?’
Or better yet, why didn’t the FBI follow up on a tip that there were a bunch of guys in flight school who had no interest in how to land a plane? The regulatory state has nothing to do with ‘good governance’ and everything to do with ‘coercion’
I wonder why the FBI failed to follow up on all the gymnastics families filing complaints regarding the MI State Dr 🤔
The FBI sure spent a lot of time on Russia Colluuuusion didn’t they Simon?
Another good example. I guess there’s just so many hours in the day…
I have to disagree with the assertion that the cost of compliance is not addressed by law. The cost of these regulation is a tax, pure and simple. The executive branch (all these alphabet agencies are in the executive branch) does not have the authority to create new taxes. None of these agencies should be able to impose rules that bear any monetary cost or carry any penalty for failure to comply without both houses of Congress passing them and the President signing into law. Not to forget, there is no power in the US Constitution for the federal government to regulate private business in this manner, making it outside the scope of federal government.
This would be like the FBI deciding that every business should keep a recording of every phone call so that if there happened to be a charge of illegal action they had the evidence to prove or disprove the allegation, and failure to keep said recording would result in a fine. We now have a regulation that costs money to comply with, carries a penalty to not comply with, violates an existing law, and was not passed into law by the legislature. Tell me how this is different?
I’ll bet the only allowable viewpoint for these disclosures is the leftist one. But truthful disclosures would include commentary on the shortcomings of the modeling being used for such disclosures. There is certainly huge uncertainty associated with the “official state policy” that CO2 is a pollutant and not just plant food. But none of this is likely to be permitted by the garbage elite overlords in DC. Therefore, thus is the first disclosure in history where the SEC will demand it is misleading.
This sounds a lot like the far-fetched and crazy “Escazú Agreement” that was invented by ECLAC and the outgoing Chilean communist president Bachelet days before leaving office (3/2/2018), in order to earn the position of “The Global Driver of Human Rights” at the UN. Days ago it was signed by the new Communist and thief (literally) Chilean president, Boric. Beware of this new “copy-paste” in the Biden administration.
Better known as the Full Employment Act for Parasitic Lawyers, Accountants and Bureaucrats.
Called “looters” in Ayn Rand’s Atlas Shrugged …
I’ll keep some cash on hand to invest in those companies whose stock prices are artificially suppressed by market sentiment driven by the imaginary climate emergency disclosures. Companies that insist on ignoring the climate Armageddon are the most likely ones to provide me a generous return when the idiots betting on the repeal of the laws of physics are out on the bread line.
In a time of massive inflation and supply chain issues to add another cost to production, especially a cost that has no potential to change anything whatsoever, is another indication that Biden is clueless. FJB.
Now that it looks like Biden will succeed in packing the courts with ideologues rather than justices, the courts won’t be able to save us from unconstitutional laws much longer.
While Putin was building up his strategic military forces, Biden was doing the same with climate lawyers and advocates. All these weapons are pointed at you by the way.
I am very happy to be retired from my former trade of corporate lawyer. One of my tasks was preparing my clients annual SEC filings. My clients were small public companies. One of them was a chain of 20 to 30 sitdown restaurants in the “casual dinning” sector (not fast food not white table cloth).
They probably could have disclosed how much natural gas and how much electricity they purchased every year, but telling you what their emissions were? Good lord, they were chefs not engineers.
But the idea of disclosing: “GHG emissions from … downstream activities in its value chain” is downright funny. “We estimate that the food consumed in our restaurants produced 1,000,000 pounds of poopoo and 1,000,000 gallons of peepee. Additionally we sold 500,000 servings of bean chili that produced 10,000,000 cubic feet of intestinal gas containing 70% methane which is a very potent GHG.”
Our government is being run by lunatics. It is not a good feeling while the Russians are brandishing nuclear weapons while they murder innocent civilians.
“Our government is being run by lunatics.”
One word. FIDUCIARY
This is just so much nonsense. An out of control bureaucracy ordering compliance for an unproven problem. These people belong in jail. How can it not be against the law to use unknown, unproven statements or theories to force companies into pretending they are saving civilization from made up catastrophes. This is just stupid.
Even when this is defeated in SEC, there is the problem of enormous financial investment firms – particularly Blackrock whose chairman has been gleefully spouting off about forcing behaviour change through unilaterally applying ESG standards onto all companies they do business with, and to force those companies to do it to the companies they do business with. With a tree structure, Blackrock wants to go around spreading ESG into the entire business world through this insidious method from themselves as the root or origin.
This could get really interesting when renewable companies have to submit their reports for up and down stream.
It’s time to abolish the SEC or fire the top 4 levels of management. Too much power and too little sense. Start over with a new agency that understands the simple mandate Congress has given it to regulate business, not to pursue the screwball whims of Leftists. Hopefully the next Republican president will understand the necessity of eradicating all the Leftist bureacrats that infest every agency of the federal government in order to restore accountable, constitutional government and fire them all.
As a side note, the power to make “rules” (laws) still lies solely with Congress, not the agencies of the Executive branch, according to the plain reading of the U.S. Constitution. Regardless of historical attempts by Congress to relinquish its responsibility to legislate and delegate that authority to agency directors, the Constitution does not grant anyone in the Executive branch legislative power.
Senator Ben Sasse explains it here:
‘Start over with a new agency that understands the simple mandate Congress has given it to regulate business, not to pursue the screwball whims of Leftists.’
Just close the agency. Congress does not have the power to regulate business, so there’s nothing to mandate to an agency.