Environmental groups are suing the Securities and Exchange Commission, alleging the agency’s new public company climate disclosure rule doesn’t go far enough to protect investors.
In a lawsuit filed March 13 in the U.S. Court of Appeals for the District of Columbia Circuit, the Sierra Club and the Sierra Club Foundation claimed the SEC’s final rule, which was approved March 6 in a 3-2 vote, falls short of the agency’s statutory mandate to protect investors, maintain fair, orderly and efficient markets, and promote capital formation. The final rule, the lawsuit said, will yield much less information about companies’ exposure to climate-based risks than the proposal on which it was based.
"While the SEC's final climate disclosure rule will provide investors with some much-needed information, the commission's arbitrary decision to remove robust emissions disclosure requirements and other key elements from the proposed rule falls short of what the law requires,” said Ben Jealous, executive director of the Sierra Club, in a statement.
The rule approved March 6 will require public companies to disclose a host of climate-related information in their periodic reports and registration statements. That information includes material climate-related risks; activities to mitigate or adapt to such risks; information about the company’s board of directors’ oversight of climate-related risks; and information on any climate-related targets or goals that are material to the company’s business, results of operations or financial condition, according to an SEC fact sheet and information outlined by SEC staff during the March 6 meeting.
But the final rule didn’t go as far as the March 2022 proposal in several aspects, most notably when it comes to greenhouse gas emission disclosures.
Under the proposal, public companies were required to disclose the greenhouse gas emissions they generate or purchase — Scope 1 and Scope 2 — and the indirect emissions generated from a company’s supply chain, if material — Scope 3 — though smaller companies would have been exempt from the final requirement.
The SEC removed the Scope 3 disclosure requirement in the final rule and made it so only large companies have to report Scope 1 and 2 emissions when those emissions are material.
The environmental groups said investors cannot adequately manage their investments without complete information on public companies’ vulnerability to climate-related risks, including greenhouse gas emissions profiles.
“The new disclosure rules fall short of providing us with the complete and consistent information we need to assess the significant financial risk that climate poses to companies and investments,” said Dan Chu, executive director of the Sierra Club Foundation, in a statement. “Through legal recourse, we aim to hold the SEC accountable to its mission: protect and empower the rights of every single investor.”
When asked for comment, an SEC spokesperson said in an email that the commission “undertakes rule-making consistent with its authorities and laws governing the administrative process and will vigorously defend the final climate risk disclosure rules in court.”
The SEC is also facing legal challenges from stakeholders on the other side of the climate debate.
On March 6, a group of 10 Republican attorneys general filed a lawsuit in the 11th U.S. Circuit Court of Appeals in Atlanta; three additional Republican attorneys general filed a lawsuit March 7 in the 5th U.S. Circuit Court of Appeals in New Orleans; and two oil and gas groups — the Texas Alliance of Energy Producers and the Domestic Energy Producers Alliance — also challenged the rule March 11 in the 5th Circuit. The lawsuits allege that the SEC exceeded its statutory mandate in finalizing the rule.
“The new rule (almost 900 pages long) does nothing to help investors get a greater return or make any difference in the climate,” said Jerry Simmons, president and CEO of the Domestic Energy Producers Alliance, in a statement. “This is simply to force a political and ideological position onto U.S. companies.”
