SEC Climate Disclosure Rules On Hold for Now
As experts and lawyers expected, companies and organizations have filed challenges to the climate disclosure rules the U.S. Securities and Exchange Commission (SEC) passed on March 6.
Some of the complaints came from organizations that believe the rules don’t do enough—partly because the regulatory agency axed Scope 3 emissions disclosures from the final version of the rules—while other complaints contend the SEC overstepped its authority, violating First Amendment rights.
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On March 15, the United States Court of Appeals for the Fifth Circuit, which covers states like Louisiana, Texas and Mississippi, granted an administrative stay based on a lawsuit brought forth by Liberty Energy, Inc. and Nomad Proppant Services, LLC against the SEC.
Opposition on both sides
The plaintiffs allege that the SEC’s rules exceed its authority, place unnecessary extra costs on industries and violate First Amendment rights.
“We believe that the climate rule is arbitrary and capricious, as it requires public companies to spend significant resources to provide information in their SEC filings in response to climate change without reliable support of any clear resulting benefit,” Chris Wright, CEO of Liberty, wrote in a statement. “We also believe that the climate rule violates our First Amendment rights by compelling speech on a controversial political matter.”
Other complainants filed similar challenges in other historically conservative courts, while those entities that said the SEC hasn’t done enough, like the Sierra Club and Earthjustice, filed their petitions in more left-leaning courts, like the D.C. Court of Appeals.
Ben Jealous, executive director of the Sierra Club, said the organization stands with the SEC’s authority to create rules around climate, but argued that its approach was not holistic enough to truly protect investors.
“While the SEC’s final climate disclosure rule will provide investors with some much-needed information, the commission’s arbitrary decision to remove robust emissions disclosure requirements and other key elements from the proposed rule falls short of what the law requires,” Jealous said. “Through legal action, we hope to ensure that all investors, including the Sierra Club and its members, have the information they need to evaluate companies’ climate-related risks, make smart investment decisions and protect their assets for decades to come.”
Michael Littenberg, partner at Ropes & Gray, said the energy company likely filed its complaint in the Fifth Circuit because it has a reputation for being a bit conservative.
“It really wasn’t a surprise that it was challenged in multiple circuits, [and] it wasn’t necessarily a surprise that the Fifth Circuit would grant a stay,” he said.
What does the stay do?
The stay guarantees that, for the moment, the SEC’s rules won’t be enforceable until or unless the stay is lifted. But because the rules wouldn’t affect the 2024 fiscal year anyway, Littenberg said, filing for a stay could be a PR move.
“The stay is a little bit of a red herring issue, because companies’ first disclosures are not due until 2026, and even that’s only a subset of companies,” he told Sourcing Journal.
Now that the Fifth Circuit has granted a stay, the actual case—which is likely to be heard as a consolidated case taking both groups of complainants’ sides of the argument into account—will be assigned at random to one of the circuits that received a complaint.
Littenberg said four of the potential courts have a reputation for being conservative, while the other two shy away from conservatism a bit more. The Fifth Circuit is still eligible for random selection, despite being the court that granted the stay in the first place.
He also noted academics and experts agree that an argument like the Sierra Club’s could be a bit more difficult to make.
Ben Pedersen, partner at Debevoise & Plimpton, said he interprets the Sierra Club filing—and others like it—as a chance to get the issue in front of a less conservative court.
“The lawsuits that were filed saying the law didn’t go far enough, the outcome of those, or the remedy sought in those, I think, may be a little more questionable—the court couldn’t compel the rules to go farther without there being additional rulemaking,” Pedersen explained. “The way I would interpret those lawsuits is essentially inserting additional circuit courts into the mix.”
If a court outside of the Fifth Circuit gets assigned the challenge, that court could in theory rescind the stay, which would allow the SEC’s rules to go into effect if legal action has not been completed by the time the rules would be active.
Until, and even after, a venue is selected, it’s difficult to predict whether a court will uphold the SEC’s recently passed rules. Regardless, it will hear both from plaintiffs interested in stronger rules and those fighting for the rescinding of the rules.
Both attorneys noted that the selected court will likely look to evaluate whether the SEC followed procedure when creating the rules, as that is a key argument from both sides.
In the meantime…
As the courts, plaintiffs and SEC hash out the legal issues at hand, companies may feel as though they are in limbo, waiting to hear whether they’ll be on the hook to report in line with the rules.
Pedersen said companies who would be affected by the SEC’s regulations should focus on preparing for the nearer-term requirements, which they would report on in 2026 for fiscal year 2025, until there are more concrete answers on whether the SEC’s rules will be thrown out or upheld.
And Littenberg noted that a number of organizations have shown interest in voluntary reporting, a trend that has started to gain traction as companies release more detailed impact reports and face questions about climate goals from existing stakeholders.
“Even if the rule is ultimately overturned and the SEC has to go back to the drawing board, we’re not going to see a situation where larger companies that are already voluntarily reporting climate information are going to stop doing that—they did it without a rule, and they’re going to continue to do it going forward, with or without a rule. It’s just going to be a question of how their disclosures change in certain areas in respect of regulatory requirements.”
For that reason, he said, suppliers of large enterprises should stay diligent.
“The fact that Scope 3 emissions are not part of the final rule may take some pressure off some of those companies that are upstream to provide greenhouse gas emissions data to some of their downstream commercial customers who are subject to the rule,” Littenberg said. “[But] there’s a lot of Scope 3 information that’s voluntarily disclosed, so I don’t think big companies are going to entirely back off asking their suppliers for GHG emissions data.”
Elections could impact future enforcement and rule-making
Today’s SEC has a Democrat leading the charge, with two additional Democratic commissioners. It also has two Republican commissioners.
The climate disclosures rules passed the SEC with the three Democratic commissioners voting in favor and the two Republican commissioners voting against, as have many other rules under Gary Gensler’s tenure as chair.
But the SEC’s chair is dictated by the party in the White House, and given that it is an election year, the short-term future of SEC leadership is also up in the air.
Pedersen said if a court strikes down the current rules, a Democrat-led SEC may try to bring forth alternative climate rules, while a Republican-led SEC may table the issue altogether.
“If the rules are ultimately vacated by a court, you could certainly see [the SEC] re-propose it. Whether or not it was re-proposed might ultimately depend upon the outcome of elections later this year. By the time a court decides to vacate the rule, assuming that the rule was vacated, the SEC would have to take the time to re-propose it, and that would take time. If the administration were to change as a result of elections later this year, the new SEC might be less likely to undertake that kind of exercise,” he told Sourcing Journal.
Alternatively, if the selected court upholds the rules, a Republican-led SEC may choose to abandon the previous work done by the current SEC.
“If the rule is not vacated…after the challenges and the administration [also] changes, there is a lot of uncertainty about its outcome, because the Republican-led SEC could decide not to enforce aspects of the rule. They could also go through the proposal process in order to repeal the rule if they wanted to,” Pedersen said.
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