Too much or not enough? SEC can't seem to win with climate disclosure rule

Just hours after the Securities and Exchange Commission adopted watered down final rules mandating uniform public company climate disclosures, stakeholders on opposing sides of the debate signaled potential legal challenges for wildly different reasons while a coalition of Republican attorneys general filed a petition for review in federal court seeking to vacate the rule entirely.

Both the Sierra Club and the U.S. Chamber of Commerce made mention of litigation in their respective statements following the SEC on March 6 adopting the final rules in a 3-2 vote, with the commission's two Republicans dissenting.

Co-led by the attorneys general of West Virginia and Georgia, 10 states filed a petition on the same day in the 11th Circuit Court of Appeals in Atlanta in an attempt to block the rules from taking effect.

"We believe that these federal agencies, and very specifically the SEC, that they need to stick to the statutory mandate that Congress gave them and avoid manipulating private actors for the sake of progressive policy," West Virginia Attorney General Patrick Morrisey said at a March 6 news conference.

The rules 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.

"These rules will enhance the disclosures that investors have been relying on to make their investment decisions," SEC Chair Gary Gensler said prior to the commission's vote. "Issuers and investors will benefit from the consistency, comparability, reliability of these disclosures."

But the final rules don't go as far as the proposal on which they were based, with the omission of Scope 3 disclosures the most glaring change. That proposal, unveiled in March 2022, garnered more than 16,000 comments and had broad backing from institutional investors and asset managers. The proposal's requirement that received the most significant debate over the past two years centered on 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. Among the parameters the SEC uses to categorize a large company is one with "an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more."

Some institutional investors, climate groups and an SEC commissioner said in individual statements that they were glad the SEC finalized the climate disclosure rules, but criticized the agency walking back the proposal's tougher greenhouse gas disclosure requirements.

"This rule is a critical step toward greater transparency and accountability, but the work to improve climate risk disclosure is not done," said Thomas P. DiNapoli, New York state comptroller and sole trustee of the $259.9 billion New York State Common Retirement Fund, Albany, in a statement. "Investors must be vocal in the protection of this rule and continue to advocate for further disclosure, like the disclosure of 'Scope 3 emissions,' which can further improve efforts to measure and address climate-related investment risks." Similarly, Marcie Frost, CEO at the California Public Employees' Retirement System, Sacramento, said in a statement that the $485.9 billion pension fund has "long been a proponent of enhanced disclosure, particularly in regards to Scope 1 and Scope 2 emissions, because it is crucial in making investments on behalf of our 2 million members."

Frost added, "While any progress is a victory for investors, there is still more work to do. Transparency is vital to the success of CalPERS' sustainable investment plan and the transition to a lower-carbon economy."

The Sierra Club and environmental law organization Earthjustice went further in their joint statement, saying that they're considering challenging the SEC's "arbitrary removal of key provisions from the final rule, while also taking action to defend the SEC's authority to implement such a rule."

Ben Jealous, executive director of the Sierra Club, went on to say that while the rules overall are a positive step, they fall significantly short of what's needed. "Greenhouse gas emissions are a critical measure of a company's handling of climate risk and Scope 3 emissions represent the vast majority of emissions from most companies."

SEC Commissioner Caroline Crenshaw, a Democrat, supported the rules but said at the March 6 meeting that "rolling back the proposal is a missed opportunity. It remains my great hope that a future commission will rise to the occasion and enact more fulsome disclosure requirements, in furtherance of our mandate and investor demand."

The SEC's decision to scale back the greenhouse gas disclosure requirements was driven not by the merits, but by "its fear of losing the lawsuit that the industry threatened nonstop and may well file anyway," said Dennis Kelleher, co-founder, president and CEO of watchdog Better Markets, in a statement.

Jamison Friedland, sustainability analyst at AXA Investment Managers, said in an email that climate disclosure rules give investors more insight into how a company is positioned to perform in a decarbonizing economy while also providing chances to identify upcoming transition risks or opportunities. "However, in the face of such weakened rules, and with the high likelihood of litigation further delaying these rules going into effect, the immediate impact of the rules will likely be relatively muted," he added.

The Chamber had a different take on the final rules than the Sierra Club, but also floated a possible lawsuit in its statement.

"For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth and legality of the SEC's climate disclosure efforts," said Tom Quaadman, executive vice president of the Chamber's Center for Capital Markets Competitiveness. "We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact. While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The Chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital market system."

Stephen E. O'Day, partner and head of the environmental law, energy and sustainability practices at law firm Smith, Gambrell & Russell, said in an interview that he expects the rules to be challenged in court, alleging the SEC didn't adhere to a proper rule-making process under the Administrative Procedure Act.

And in Congress, much like the attorneys general petition filed in federal court, Republican lawmakers in recent months have questioned whether the SEC has the authority to promulgate a climate disclosure rule at all. Shortly after the March 6 vote, Sen. Tim Scott, R-S.C., ranking member of the Senate Banking Committee, announced his intent to force a vote to overturn the rule under the Congressional Review Act.

"Ignoring the concerns of Americans, small business owners and stakeholders from across the country, Chair Gensler pressed forward with a final rule that falls outside his agency's authority and does far more to advance the Biden administration's far-left climate agenda than uphold the SEC's mandate to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation," Scott said in a statement.

SEC Commissioner Mark T. Uyeda, one of the two commissioners who dissented, said the rules are the culmination of an effort by interest groups to "hijack" and use the federal securities laws for their climate-related goals.

"Today, much emphasis will be placed on how this rule on climate-related disclosure has been dialed back from the proposal and is focused on providing material information to investors, and how the commission is not a climate regulator," Uyeda said. "To that, I recommend advice that I give to would-be investors: Do not be fooled by the marketing materials and read the prospectus instead. And by the time you finish all 886 pages of today's release, you will conclude that this rule is climate regulation promulgated under the commission's seal."

The rules will take effect 60 days after publication in the Federal Register, though compliance deadlines will be phased in over several years.

Elad Roisman, a partner at law firm Cravath, Swaine & Moore and former Republican commissioner and acting chair of the SEC, said in an email that despite the final rules being scaled back, "They represent the biggest change to the SEC's disclosure regime for public companies in decades. Some of these changes will require companies to start work in the near future in order to track information for their FY 2025 filings. Companies and their advisers will need to spend considerable time combing the rules to see what companies will need to do now and what further resources they will require in order to comply."