SEC climate rules likely to land in court

The final rules have been modified from the SEC’s initial proposals (tabled back in March 2022), largely to reduce the reporting demands on firms by cutting back on the level of mandatory disclosure, in particular by scrapping a plan to require companies to report on so-called Scope 3 emissions — those generated indirectly by a company’s operations, including in its supply chains.

Companies will still be required to report on their own direct Scope 1 and 2 emissions, along with a variety of other things, including their material climate-related risks; the impacts of those risks on companies’ strategies, business models and outlooks; and efforts to address those risks, such as transition plans.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” said SEC chair Gary Gensler in a statement supporting the rules. “The rules will provide investors with consistent, comparable and decision-useful information, and issuers with clear reporting requirements.”

“Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today,” he said. “They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

The revised rules were developed in the wake of a comment period that attracted 24,000 comment letters, including more than 4,500 unique letters, the SEC reported. However, the scaled-back rules continue to face opposition.

In a statement dissenting from the rules, SEC commissioner Hester Peirce acknowledged that the requirements have been modified, but said that “these changes do not alter the rule’s fundamental flaw — its insistence that climate issues deserve special treatment and disproportionate space in commission disclosures and managers’ and directors’ brain space.”

Business lobby groups also remained concerned about the rules’ impact, and signalled the possibility of litigation to challenge the new requirements.

“While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors,” said Tom Quaadman, executive vice-president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, in a statement.

“We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact,” he said. “The Chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital market system.”

Environmental advocates signalled that they are gearing up for a possible legal fight too.

“Although the rule represents an important step forward for investors seeking greater transparency on companies’ handling of climate risks, the rule is significantly weaker than the proposed version from March 2022,” said environmental groups Sierra Club and Earthjustice in a statement.

As a result, the groups said they are “considering challenging the SEC’s arbitrary removal of key provisions from the final rule, while also taking action to defend the SEC’s authority to implement such a rule.”

Specifically, they complained that the SEC capitulated to industry pressure and threats of litigation by removing the proposed Scope 3 reporting requirements, and by adopting a materiality standard for Scope 1 and 2 reporting. The groups promised the details on potential legal action in the coming days.

Shareholder advocacy group As You Sow also warned that the final rule falls short of investors’ needs: “[B]ecause it does not require companies to compile and report Scope 3 emissions, they may be unaware of significant risk in their supply chains, and investors will not be fully informed of hidden climate risk in their investments.”

“Failure to assess climate risk doesn’t save money — it does the opposite,” said Danielle Fugere, president and chief counsel of As You Sow, in a statement. “When incomplete information causes companies and investors to misallocate resources, it costs us all more in the long term.”

Fund industry trade group the Investment Company Institute (ICI) welcomed the SEC’s decision to drop Scope 3 reporting requirements, and it called on the regulator to be similarly cautious when ramping up climate disclosure rules for investment funds.

“As we await anticipated final rules from the SEC requiring funds and their managers to enhance their ESG disclosure, we urge the commission not to impose greater obligations on funds and their managers than on public companies and to recognize the importance of appropriately sequencing fund compliance with any new public company disclosure requirements,” said Eric Pan, president and CEO of the ICI, in a release.