The SEC’s Final Climate-Related Disclosure Rule: Too Far or Not Far Enough?
SEC Chair Gary Gensler participating in a meeting of the Financial Stability Oversight Council at the U.S. Treasury in Washington, D.C., July 28, 2023. Kevin Dietsch via CNBC.
By Emily Tsairis ‘25
On March 6, 2024, in a 3 to 2 vote of the Commissioners, the U.S. Securities and Exchange Commission (SEC) adopted and finalized their climate-related disclosure rules with the objective of intensifying disclosure around climate-related opportunities and risks for U.S. public companies and most foreign private investors. Essentially, these final rules will require domestic and foreign registrants to report extensive climate change-related information in their SEC filings. The SEC’s rule was approved with support from Commissioners Jamie Lizárraga, Caroline Crenshaw, and SEC Chair Gary Gensler—who are all Democrats. Republican Commissioners Mark Uyeda and Hester Peirce voted against this rule for venturing “outside of its lane,” according to Uyeda. On March 6, Gensler accentuated his approval with the ruling in granting investors consistent and dependable disclosures about climate risks; the SEC “has a role to play,” and investors have “indicated that they are making decisions in reliance on that information.”
However, quickly after March 6, 2024, a coalition of 10 states filed a joint lawsuit in the U.S. Court of Appeals for the Eleventh Circuit and voiced their dissatisfaction with the rule as exceeding “the agency’s statutory authority,” describing it as “capricious” and “an abuse of discretion” in their petition. The U.S. Chamber of Commerce also filed a suit with the goal of halting the SEC rules; other dissenters, such as fracking companies Liberty Energy Inc. and Nomad Proppant Services LLC, filed suits as well. In total, nine lawsuits were filed in six different circuits by oil and gas industry groups, environmental advocacy organizations, and Republican attorneys generals, among other petitioners.
Thus, the Fifth Circuit issued a temporary administrative stay on March 15, 2024 to halt the rule, which dissolved on March 22, 2024 when the Judicial Plant on Multidistrict Litigation lottery determined that the Eighth Circuit Court of Appeals would hear the nine consolidated lawsuits. As the legal backlash accelerates and more requests for administrative stays flow into the Eighth Circuit, this near-900 page rule has garnered over 24,000 comment letters and appears poised to become even more groundbreaking and controversial as one of the “biggest overhauls of U.S. corporate reporting in years.”
The SEC Climate-Related Disclosure Campaign: A Historical Background and Essential Legal Takeaways
The SEC’s finalization of climate-related company disclosures was years in the making, as a comprehensive background of SEC climate-related disclosures exists. The SEC has required disclosure regarding a myriad of environmental matters for the past 50 years, but a more carefully-woven objective of standardization began in 2010 with the Commission’s Guidance. This interpretive release introduced the idea of more stringent climate-related disclosures, “providing guidance” to public companies regarding how the Commission’s existing disclosure requirements apply to climate change matters and registrant reporting.
In March 2022, a more specific handling of disclosure expectations was reported: the SEC proposed rules on the “Enhancement and Standardization of Climate-Related Disclosures for Investors,” which laid out an initial framework of requiring “information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.” Hence, the March 6, 2024 disclosure rule embodied a culmination point to a SEC campaign that “has fractured Washington for two years.”
To summarize the key components of the SEC’s final climate-related disclosure rule, the rule will require disclosure in annual reports and registration statements of climate-related risks that have had or are reasonably likely to have “an actual or potential material impact” on the “registrant’s strategy, business model, and outlook,” according to Item 1502(b). The rules also request reporting of Scope 1 and 2 greenhouse gas emissions, as well as losses related to carbon offsets and renewable energy credits or certificates (“RECs”) to achieve a registrant’s compulsory disclosed “climate-related targets or goals,” among a wealth of other requirements. Specifically, this consideration of carbon offsets and RECs is located within the new Article 14 of Regulation S-X. The SEC also elucidated that the use of the term “materiality” will be consistent with longstanding SEC disclosure rules. “Materiality” refers to the significance of information to a company’s voting and investment decision-making, not to external climate-related matters.
The most evident divergences between the March 2022 proposed rules and the finalized March 2024 rules are the new addition of a materiality qualifier, an extended timeline for disclosures, and most importantly, the retirement of the Scope 3 greenhouse gas emissions disclosure—which could be a potential stratagem to survive the ensuing legal challenges by providing flexibility to companies when assessing their climate risks. Hence, numerous companies will now be permitted, and possibly empowered, to elude reporting of Scope 3 emissions, which refer to all indirect emissions that occur in a company’s value chain, such as the transportation of goods and business travel.
While Scope 1 includes all direct emissions generated from sources “owned or controlled” by an organization and Scope 2 pertains to all indirect emissions generated by the purchase of an organization’s electricity, Scope 3 emissions constitute the bulk of many companies’ carbon footprints. For instance, around 88% of Coca-Cola’s 2023 emissions originated from their traveling, transportation, and packaging—which all filter into the category of Scope 3 emissions. However, although eliminating the Scope 3 emission disclosure may constitute a “watering down” of the SEC’s original proposal, voluntary Scope 3 emissions reporting has increased from 34% of companies in 2021 to 53% in 2023 and is projected to increase, according to Boston Consulting Group. Nonetheless, there is still the other sizable percentage of companies which, when granted the opportunity to evade Scope 3 emissions disclosures, will seize it with vigor.
Too Far or Not Far Enough?
How can the nuanced, and often disparate, viewpoints of states, businesses, and environmental groups regarding the new rules be reconciled, if at all? Seven out of the nine challengers to the rule claim that it exceeds the SEC’s jurisdiction and imposes extensively oppressive and irksome requirements for domestic registrants and foreign private issuers (“FPIs”) to sift through. West Virginia Attorney General Patrick Morrisey, who is associated with the 10 state coalition lawsuit, even went so far as to voice that the rule is “wildly in defect, and illegal and unconstitutional.” Tom Quaadman, the executive vice president of the U.S. Chamber of Commerce’s capital-markets group, highlights his belief that the SEC endeavors to “micromanage” how companies make key decisions about materiality. He posits that this will ultimately engender more “confusion” and undermine investor confidence. Clearly, those involved in a majority of lawsuits against the SEC’s finalized climate-related disclosure rule will point to their supposed belief that the SEC is expanding upon its statutory authority, as well as muddling and masking their financial-related jurisdiction as environmental regulation.
SEC Commissioner Mark Uyeda, who voted against the rule, even sustains this interpretation. He argues that by more explicitly addressing “political and social issues,” the SEC is feeding a “precedent for using its disclosure regime as a means for driving social change,” which is outside its purview. While similarly exclaiming that these rules “put climate on a pedestal as the SEC’s ‘pet topic of the week,’” SEC Commissioner Hester Peirce also stresses her belief that the “prescriptive” rules will lead to broad disclosures, producing excessive costs for companies.
Therefore, global law firm Sidley Austin LLP asserts that the most obvious legal challenge to be employed by these dissenters will reside under the major questions doctrine, which assumes that Congress does not discreetly delegate to an agency the authority to make key policy decisions—it must explicitly speak upon these points. The U.S. Supreme Court championed the major questions doctrine in West Virginia v. EPA, 142 S. Ct. 2587, 2609 (2022) by emphasizing the Supreme Court’s responsibility to mitigate “agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.” Challengers who believe the SEC rule “went too far” will presumably reason that the SEC’s more generalized investor-protection mandate does not allow such a “groundbreaking” climate disclosure rule to be enforced.
However, Margaret Farrell, Hinckley Allen’s securities law group’s chair, does not believe this argument will ultimately triumph and shift the trajectory of the SEC’s new climate-related disclosure rule. The SEC possesses an “obligation, which the SEC underscored a few years back, to consider the impact of climate change and climate events on the business, regardless of the new rule.” SEC Chair Gary Gensler is also confident in the SEC’s legal standing. Currently, it is a waiting game to ascertain which arguments will be presented, as a specific date for the Eighth Circuit Court of Appeals hearing has yet to be decided.
On the other hand, some petitioners—two environmental agencies out of the nine lawsuits—argue that the rules do not go far enough. SEC Commissioner Caroline Crenshaw, who is a staunch supporter of the March 2022 original proposal, echoes this sentiment. She describes the new rule’s requirements as the “bare minimum” and argues it could expand even further, which drastically differs from its supposed “prescriptive” nature as stated by SEC Commissioner Peirce. There is a duality of viewpoints amongst the Commissioners: Peirce and Uyeda believe that climate and environmental protection is not a function the agency is specifically tasked with, but Crenshaw is fearful that these “obligations that I see as our responsibilities today” will be left to future commissions if not safeguarded.
Environmental nonprofit groups like Sierra Club, which is represented by the environmental law nonprofit Earthjustice in its lawsuit against the SEC, and the Natural Resources Defense Council essentially proclaim that the scale of the rules is too limited. Despite the fact that the SEC’s final climate-related disclosure rule will provide investors with “much-needed" information, dropping “some very crucial disclosure requirements that were in the proposal” is a mistake that is “fundamentally wrong,” according to Earthjustice senior attorney Hana Vizcarra. While Vizcarra draws an intersection between the legal sphere and morality, there is a stronger call to practicality imbued in her argument: the Sierra Club group alleged in a statement that they cannot properly manage their investments without full information pertaining to publicly-traded companies’ greenhouse gas profiles and climate risks.
Talk of the erasure of Scope 3 emissions reporting is also enveloping the political scene, even incensing many supporters of the SEC’s rule, such as Senator Elizabeth Warren (D-Mass.). Warren is very vocal about her disappointment in the weakening of the rule. Despite her objections, Warren fervently proclaimed in a March 6, 2024 statement that the SEC must now “do everything in its power” to ensure the rule’s “robust implementation.” It is evident that the new rule is riddled with controversy; nonetheless, Warren and many other advocacy groups and consultants assert that the rule is still necessary for uniformity of disclosures, despite its imperfections.
The depth of this backlash paints a clear picture of the SEC’s future legal battles: it will be a colossal endeavor to achieve a scenario in which both financial corporations and environmental organizations are satisfied enough to comply with the new climate-related disclosure rule.