In a significant move back in mid-March, the Security and Exchange Commission (SEC) officially adopted rules that would have compelled large companies to disclose their Scope 1 and Scope 2 emissions as well as their climate risk as part of their financial due diligence. However, in early April, due to the mounting legal pressure and pushback from Republican lawmakers, the SEC voluntarily stayed these new rules, pending a final decision from the courts. The rules aimed to enhance transparency around climate risks and greenhouse gas emissions for investors. Here’s what you need to know about the latest political wrangling around these rules.

What’s in the SEC Climate Rules?

The SEC's rules for climate-related disclosures were originally adopted on March 6 and were designed to enhance the consistency, comparability, and reliability of climate-related information provided by public companies. The rules aimed to respond to investor demands for better information on how climate-related risks impact businesses and how they are managed, as well as provide transparency around companies' greenhouse gas emissions and climate governance. The key aspects of these rules included requirements for companies to disclose material climate-related risks and their financial impacts, governance and management of such risks, and specific greenhouse gas (GHG) emissions data for larger companies. Specifically, the rules required companies to disclose:

1. Material climate-related risks and their financial impacts, including risks related to physical impacts of climate change, transition risks, and expenditure metrics
2. Governance and management of climate-related risks, including board oversight and management's role
3. Specific greenhouse gas (GHG) emissions data for larger companies, including Scope 1, Scope 2, and associated emissions factors

These rules were aimed at larger companies which tend to face more rigorous demands, including quicker filing deadlines for quarterly and annual reports. While the SEC had ambitious plans to force what they identify as "large accelerated filers," or companies with a public float (the total value of the company's shares held by the public) of $700 million or more, to more accurately disclose their environmental risks, impacts, and governance around climate change, the rules were significantly changed by the time they became final in early March. The final rules scaled back some of the initial proposed requirements in an effort to address concerns raised during the public comment period.

The rules introduced a "materiality" threshold for disclosures, meaning that companies only needed to report information that is considered materially significant to investors. This approach aimed to prevent the overload of non-essential information. Notably, the SEC stripped out the requirement to disclose Scope 3 emissions, which cover emissions from a company's value chain, with the aim of addressing concerns from opponents about the extensive scope and potential burden of the earlier versions of the rule.

Moreover, a "safe harbor" provision was included to protect companies from certain legal liabilities associated with the forward-looking statements made in these disclosures, such as statements about future climate-related plans like transition strategies and carbon pricing assumptions. This provision aimed to address concerns around legal exposure for projections and estimates. As soon as the rules were finalized, a number of industry groups, Republican lawmakers, and conservative organizations spoke out against them, promising legal threats and challenges.

Who is Suing to Change the SEC Rules?

The watered-down rules face legal challenges from all sides–both environmental activists and conservative Republican groups have piled on to change the rules.

In mid-March, a federal court temporarily halted the new rules, in a case brought by a pair of fracking companies: Liberty Energy and Nomad Proppant. According to the New York Times, the companies argued that "There is no clear authority for the S.E.C. to effectively regulate the controversial issue of climate change" and that the rules exceeded the SEC's statutory authority. Following this decision by the U.S. Court of Appeals for the Fifth Circuit, the SEC voluntarily decided to stay the rules until further legal clarity could be had on the challenges to the rules' validity.

The SEC is getting it from all sides on the climate disclosure rules.

Currently, environmental organizations like the Sierra Club and Earthjustice are suing the SEC for their rules, arguing that the required disclosures don’t go far enough. These groups are pushing for the reinstatement of Scope 3 emission reporting requirements. They argue that the final rule issued by the SEC fails to provide comprehensive and necessary information on greenhouse gas emissions, particularly the exclusion of Scope 3 emissions, and contend that such emissions are critical for assessing a company's overall climate impact. They also argue that the scaled-back requirements compromise investor's ability to make informed decisions regarding climate-related risks.

On the other side, a number of large corporations and industry groups, as well as ten conservative Republican-led states, are suing the SEC to block the implementation of its new climate disclosure rules. This legal action is spearheaded by West Virginia Attorney General Patrick Morrisey, and includes states like Georgia, Alabama, and Alaska. These states and corporate opponents are pushing back on the SEC, arguing that the rules impose overly burdensome and costly requirements on companies to disclose climate-related information, which they believe extends beyond the SEC's statutory authority and effectively enacts environmental regulations through a backdoor. They claim the rules would demand an excessive amount of detailed data from companies, going beyond what is necessary for investor decision-making on financial risks. These states have filed their petition in the U.S. Court of Appeals for the 11th Circuit, challenging the constitutionality and statutory basis of the SEC's climate disclosure rules

If that kind of argument sounds familiar, it should. It's similar to the one that conservatives are currently using to try and dismantle and undermine federal agencies like the Environmental Protection Agency or EPA, which enforces environmental regulations. The U.S. Supreme Court is currently weighing two cases that would have widespread implications for the EPA as well as other federal agencies and their ability to enforce regulations. The first case, Relentless, Inc v. Department of Commerce, could gut what’s known as the Chevron deference, which allows federal agencies to interpret and enforce laws that are meant to protect the public, environment, and consumers. The second, Loper Bright Enterprises v. Raimondo could determine whether or not to stay what’s known as EPA’s Good Neighbor Plan, which is supposed to prevent smog and pollution from one state from drifting into another. Both cases are on the Supreme Court’s docket this year and will be decided. The Verge has a great explainer and tick-tock on both if you’re interested in digging deeper. We also plan to keep a close eye on both of these and see where the conservative court comes down on the final decision, as both will have wide-reaching implications for climate change.

What Happens Now?

For now, the SEC climate disclosure rules are on hold pending the legal challenges, though some experts fully expect that many large public companies will begin efforts to comply with the existing requirements anyway. That's because major companies that do business globally, including in regions like California and Europe where emission disclosures are much stricter, will likely have to comply with similar climate reporting mandates regardless of the SEC rules' status. As this PBS story points out, it does not make business sense for large multinationals to delay or bet against the SEC rules given the global trajectory of climate disclosure regulations. Most experts believe these companies are already preparing to enhance their climate risk reporting and emissions disclosures to comply with the SEC rules and similar mandates around the world.

We'll continue to keep an eye on what happens with these legal challenges to the SEC climate disclosure rules, but like most high-profile regulatory and legal battles, the process will likely be protracted and slow-moving across multiple courts. Experts anticipate the rules could be tied up in litigation for years before a final resolution.

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