The SEC dropped its defense of the climate disclosure rule. What happens now?

The Securities and Exchange Commission’s decision to halt its legal defense of its public company climate risk disclosure rule wasn’t a surprise given the commission’s new Republican majority. But the rule isn’t dead yet and most public firms will still need to track their climate risks, experts said.

The consolidated lawsuit challenging the rule currently before the 8th U.S. Circuit Court of Appeals in St. Louis is still pending despite the SEC’s March 27 decision.

The court could still rule on that lawsuit and decide to uphold the rule in whole or in part, or remand the rule to the SEC for further consideration, attorneys from law firm Sidley Austin said in a client alert.

Although the SEC has bowed out, other parties could still defend the rule. In April 2024, the 8th Circuit issued an order allowing 19 Democratic attorneys general to intervene in its defense.

The Democratic attorneys general contacted by Pensions & Investments either declined comment or did not respond to inquiries. However Bryan McGannon, managing director at US SIF: The Sustainable Investment Forum, a nonprofit whose members include institutional investors, asset managers and financial advisers, expects them to “intervene in full faith of defending the rule.”

“Ultimately, the facts on the ground have not changed,” McGannon added. “Climate risk is still financial risk, and investors are still seeking this information from companies to properly price their risk.

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 2024 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.

SEC acting Chair Mark 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.

Then on March 27, Uyeda and fellow Republican Commissioner Hester Peirce 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 March 27 statement.

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 Republican commissioners have been vocal in their opposition to the climate disclosure since it was first proposed, which was why the March 27 decision wasn’t a surprise, according to Michael Littenberg, a partner at law firm Ropes & Gray.

“The Republican commissioners have expressed the view that the SEC’s principles-based disclosure regime already is sufficiently flexible and robust to address climate matters to the extent they are material and rules specific to climate are therefore unnecessary,” he said.

Littenberg added that it’s premature to speculate on next steps concerning the legal challenge before the 8th Circuit, but he and other experts said no matter what happens to the SEC rule, climate disclosures will still be factor public companies have to consider.

California and international bodies such as European Union have promulgated their own climate disclosure rules in recent years, which means many firms will have to make the requisite climate disclosures even if the SEC rule is struck down.

“Irrespective of the fate of the SEC rules, as a general matter, climate disclosures will continue, even if not required under SEC rules,” Littenberg said.

California in 2026 will begin requiring businesses with revenues over $1 billion annually to report their greenhouse gas emissions. Similar bills have been introduced in New York, Colorado, New Jersey and Illinois, attorneys from law firm Foley & Lardner noted in an online post.

Lisa Rushton, a partner at law firm Womble Bond Dickinson and head of its business litigation practice group, said she’s advising corporate clients to “stay the course” with what they’re doing on climate disclosure.

“While the ‘pendulum’ of regulatory focus has swung wide under the Trump administration, there is a strong possibility that there will be a reciprocal swing in the future,” Rushton and colleagues said in a client alert. “As a result, companies should consider maintaining documentation of climate-related risks and management strategies should a similar rule be promulgated.”

Furthermore, certain shareholders will still push for climate disclosures, she added. Companies will still receive “pressure from the public to continue to push forward with some of the commitments that they've made,” Rushton said.

Added McGannon, “This is a material data point for a lot of firms. And so, investors are going to continue to push for this. (And) whether it's through the shareholder engagement, it would be ideal to have comparable consistent information that is reliable investors of all types can depend on.”