SEC halts climate disclosure rule pending legal challenge

The Securities and Exchange Commission said it will voluntarily halt implementation of its new public company climate disclosure rule while a federal court considers multiple legal challenges on a consolidated basis.

The SEC said in an April 4 filing that it “has determined to exercise its discretion to stay” the final rule pending judicial review.

After the SEC finalized its rule March 6, nine lawsuits were filed in six different circuits. A lottery was then held and determined that the challenges will be heard on a consolidated basis in the 8th U.S. Circuit Court of Appeals in St. Louis.

The rule in question 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.

The final rule didn’t go as far as the March 2022 proposal on which it was based, but it still drew sharp pushback.

A bulk of the lawsuits, like those from energy companies, business groups and Republican attorneys general, make similar arguments, claiming that the SEC doesn’t have the authority to issue such a rule, that the rule is arbitrary and capricious under the Administrative Procedure Act, and also violates the First Amendment by effectively mandating discussions about climate change.

But the SEC also received a challenge from the Sierra Club, claiming the rule falls short of the agency’s statutory mandate to protect investors; maintain fair, orderly and efficient markets; and promote capital formation.

In issuing the stay, the SEC said it is not departing from its view that the final rule is “consistent with applicable law and within the commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions.”

The SEC said it will continue to vigorously defend the rule in court, but added that issuing a stay at this point will “facilitate the orderly judicial resolution of those challenges and allow the court of appeals to focus on deciding the merits.” Also, a stay avoids “potential regulatory uncertainty if registrants were to become subject” to the rule’s requirements during the legal proceedings.

The rule’s earliest implementation date is slated for March 2026, but with the SEC’s stay and a legal process that could take more than a year to conclude — not counting any potential appeals — the implementation date will likely get pushed back, said Christian D. H. Schultz, a partner at law firm Arnold & Porter Kaye Scholer and former assistant chief litigation counsel in the SEC's enforcement division.

In the meantime, Schultz said market participants should still be cognizant of climate disclosure requirements out of California and Europe, and noted that the SEC will still be focused on the topic.

“The SEC has a panoply of anti-fraud tools that it can use to monitor company’s disclosures,” Schultz said. “Just because these are stayed doesn’t mean the SEC won’t continue to have its offices and divisions, particularly the enforcement division, paying close attention to what companies are saying” with respect to climate risk.