SEC Adopts Climate Disclosure Rule; Oppositional Litigation Already In Progress
Overview
The SEC on Wednesday, March 6th voted 3-2 to adopt new rules that will require most publicly traded companies to disclose climate-related risks in their registration statements and annual reports. Companies will need to start reporting emissions for fiscal year 2026. Some smaller companies won’t be required to disclose emissions. The rule proposal was first made in March 2022, but the SEC extended the public comment period several times.
The final rules will require companies to disclose the following:
“Material” climate-related risks, as well as any activities to mitigate or adapt to those risks
The costs of severe weather events and other natural conditions, and the effect of those events on their business conditions
Any climate-related targets or goals that are material to their business
Processes the company has for identifying and managing material climate-related risk
Information about the board of directors’ oversight of climate-related risks
Both Republican commissioners, Hester Peirce and Mark Uyeda, voted against the rule Wednesday. Peirce said it “promises to spam investors with details about the commission’s pet topic of the day, climate.” Uyeda said it would make U.S. capital markets less attractive to companies.
Commissioner Statements
Chair Gary Gensler
Mr. Gensler supported the adoption of final rules mandating climate risk disclosures by public companies and in public offerings. He elaborated that the SEC took a “layered” approach to disclosure of Scope 3 greenhouse gas emissions. While many investors are using Scope 3 information in their investment decision making, based upon public feedback, they are not requiring Scope 3 emissions disclosure at this time and dropped it from consideration. He concluded that the final rules are an important step for U.S. capital markets, providing U.S. issuers with standards to which they can point, and will enhance the consistency, comparability, and reliability of disclosures.
Commissioner Hester M. Peirce
Ms. Peirce dissents from the final rule, arguing that it imposes excessive and unjustified requirements related to climate disclosure. She contended that the existing principles-based, materiality-focused approach to climate risk disclosure is sufficient and that the new rule is unnecessarily prescriptive. She questioned the Commission's authority to mandate such disclosures and suggests that the rule could lead to a flood of special interest disclosures that are not relevant to all investors. Ms. Peirce also expressed concerns about the costs of compliance and the potential impact on corporate behavior.
Commissioner Caroline A. Crenshaw
Ms. Crenshaw emphasized that the proposed rule is intended to benefit investors by providing them with consistent and reliable climate risk disclosures. Despite supporting the rule as a step forward, the she expressed disappointment that it does not include more robust requirements, such as mandatory reporting of Scope 3 greenhouse gas emissions. Ms. Crenshaw said that many of the thousands of comments the SEC received made it abundantly clear how GHG emissions are a key metric for investors in understanding climate risk. She argued that the Commission has the statutory authority to enact such requirements and called for future commissions to consider more comprehensive disclosure rules.
Commissioner Mark T. Uyeda
Mr. Uyeda did not support the final rule. He suggested that the rule was influenced by groups seeking to use disclosure requirements for their own political and social agendas, rather than for the benefit of investors. He contended that the rule would impose significant costs on companies and divert resources away from other important matters. He also criticized the lack of exemptions for smaller reporting companies and emerging growth companies.
Commissioner Jaime Lizárraga
Mr. Lizárraga supported the final rule. He argued that by requiring registrants to provide standardized climate risk-related disclosures in Commission filings, market participants will benefit from being able to more efficiently analyze information that will be integrated with other important disclosures, such as a full description of the company, other disclosed risks, and the company’s financial statements. He believes the final rule will also provide investors with more liability protections than they receive today.
Legal Reactions
Following the March 6th decision, West Virginia Attorney General Patrick Morrisey announced a coalition of 10 states will file a legal challenge to new regulations requiring public companies to disclose their climate-related risks and direct greenhouse gas emissions. West Virginia and Georgia co-led the petition for review filed in the U.S. Court of Appeals for the 11th circuit, Morrisey said, joined by Alabama, Alaska, Indiana, Oklahoma, South Carolina, Wyoming and Virginia. You can see a copy of that petition here. The U.S. Chamber of Commerce is also considering litigation, and Republicans in Congress are vowing to try to overturn it.
A major concern of these states is that the SEC may not have statutory authority to require companies to disclose climate-related risks to investors. Since the commission put out its proposal, the U.S. Supreme Court issued a decision sharply curtailing the executive branch’s authority to make policy without congressional direction, striking down an Obama-era Environmental Protection Agency regulatory scheme. The high court this year heard arguments on whether to scrap what is known as the “Chevron Deference,” a legal precedent that directs courts to defer to an agency’s interpretation of the law governing it when the statutory language is ambiguous. The conservative-dominated Supreme Court is expected to dramatically limit or eliminate Chevron Deference this Summer.