SEC halts legal defense of climate risk disclosure rule

The Securities and Exchange Commission has stopped defending its climate risk disclosure rule in court.

The commission’s two Republicans — acting Chair Mark Uyeda and Commissioner Hester Peirce — on March 27 voted to end the agency’s legal defense of the rule. The lone Democrat, Commissioner Caroline Crenshaw, dissented.

The goal of the agency’s “action and notification to the court is to cease the commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules,” Uyeda said in a statement.

Under the Biden administration, the SEC in March 2024 finalized its climate disclosure rule, requiring public companies to divulge a host of climate-related information in their periodic reports and registration statements. After nine lawsuits were filed against the rule, all challenges were combined to be heard by the 8th Circuit on a consolidated basis.

The SEC in April halted implementation of the rule, which had broad backing from institutional investors, pending the legal challenge.

With former Chair Gary Gensler then in charge, the SEC in August filed a brief in the 8th Circuit defending the rule, declaring it was within the agency’s authority and that climate-related risks — and a public company’s response to those risks — can significantly affect a company’s financial performance and position.

But shortly after the change in administration, Uyeda in February issued a statement saying he did not support the rule — he voted against it in March 2024 — and asked SEC staff to delay scheduling the case for arguments.

Uyeda’s concerns about the rule are similar to those of the plaintiffs in the consolidated lawsuit, which include energy companies, Republican attorneys general and business groups. Among their assertions, the plaintiffs claim the SEC doesn’t have the authority to issue such a rule, the rule is arbitrary and capricious under the Administrative Procedure Act, and also violates the First Amendment by effectively mandating discussions about climate change.

The SEC on March 27 sent a letter to the court stating that the commission withdraws its defense of the rule, and that commission counsel are no longer authorized to advance the arguments in the brief the commission filed in August, according to an SEC statement.

The letter states that the commission yields any oral argument time back to the court.

But while the SEC will no longer argue on behalf the rule, the 8th Circuit in April issued an order allowing 19 Democratic attorneys general to defend the rule.

Republican lawmakers, who have strongly opposed the rule, welcomed the SEC’s announcement.

“This reversal is a victory for common sense, American businesses, and the rule of law,” said Rep. French Hill, R-Ark., chair of the House Financial Services Committee, Rep. Ann Wagner, R-Mo., and Rep. Bill Huizenga, R-Mich., in a statement.

“This decision marks a turning point for the SEC to return to its fundamental purpose and stop being used as a political tool to advance policies that properly belong in the legislative branch.”

In a statement of her own, the SEC’s Crenshaw criticized the decision and said the Republican-led commission is attempting to dismantle the rule “unlawfully.”

She said the Administrative Procedure Act prescribes a careful, considered framework that applies both to the promulgation of new rules and the rescission of existing ones, but the agency is now looking for a shortcut.

The SEC’s “actions are but one symptom of a much larger problem — the commission taking shortcuts in order to achieve preferred outcomes — this time by skirting the APA,” Crenshaw said.

“We are now firmly in a period of policy-making through avoidance and acquiescence, rather than policy-making through open, transparent, and public processes. This approach does not benefit the markets, capital formation, or investors. In this instance, the majority of the commission is hoping to let someone else do their dirty work.”

Ben Cushing, director of the Sierra Club’s sustainable finance campaign, said in a statement that the SEC ending defense of the rule is a dangerous retreat from investor protection.

“Letting companies hide climate risks doesn’t make those risks any less real — it just makes it harder for investors to manage them and protect their long-term savings,” Cushing said. “The SEC is trying to leave investors in the dark at exactly the moment when transparency and action are most needed — but states across the country are stepping up to ensure corporations can’t conceal their climate risks.”

Cushing noted that California is implementing its own climate-related disclosure laws that passed in 2023.