On August 6, the SEC filed its much-anticipated legal brief in the Eighth Circuit Court of Appeals supporting its controversial Climate Rules and responding to the arguments laid out in petitioners’ consolidated petitions for review of the Climate Rules.
The SEC adopted the Climate Rules—which require publicly traded companies to disclose, among other things, information on their Scope-1 and Scope-2 greenhouse gas emissions and climate-related risks—by a 3-2 vote on March 6, 2024. Reporting obligations under the Climate Rules were to be phased in over several years according to the size of the company and the type of disclosure, with the first compliance period beginning in 2025.
Various business and industry groups, as well as several conservative states, immediately challenged the rules in court. Those challenges have been consolidated in the Eighth Circuit Court of Appeals, and the SEC stayed implementation of the Climate Rules while the litigation is pending.
In a related court filing, the SEC stated that it will publish a new effective date and phase-in period for the rules’ implementation in the Federal Register at the conclusion of the stay—assuming the Climate Rules survive litigation.
The challenges boil down to three questions:
We explore the SEC’s response to each of these questions below and offer our thoughts on how companies should proceed as the litigation plays out in the courts.
Does the SEC have the statutory authority to adopt each of the Climate Rules?
The Eighth Circuit’s ruling on this question is highly anticipated, particularly in light of the Supreme Court’s recent decision in Loper v. Raimondo, in which the Court overruled Chevron v. Natural Resources Defense Council and the judiciary’s long-standing practice of deferring to agencies’ reasonable interpretations of ambiguous federal laws, including whether an agency has acted within its statutory authority.
The decision in Loper was issued on June 28, 2024, after the petitioners filed their initial briefs challenging the Climate Rules, and was not, therefore, raised in the petitioners’ briefs. Many have expressed their belief that the Loper decision could pose a significant challenge to the Climate Rules—along with the “major questions” doctrine adopted by the Supreme Court in West Virginia v. EPA in 2022, which holds that if an agency seeks to regulate an issue of major economic and political significance, its action must be supported by clear congressional authorization. But the SEC brief argues that neither the Loper decision nor the major questions doctrine should apply in this case.
Citing the Loper decision, the SEC maintains that it has acted within the boundaries of the discretionary authority Congress granted it under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act). The SEC explains how, in enacting the Securities Act and the Exchange Act, Congress adopted a “disclosure-based regime” on the belief that “if investors have full and fair disclosure of decision-useful information, they would be able to protect their financial interests and simultaneously promote efficiency and capital formation in the securities markets,” and that, based on this belief, Congress expressly delegated to the SEC statutory authority to require (in addition to the required disclosures enumerated by Congress) such additional disclosure as the SEC deems “necessary or appropriate in the public interest or for the protection of investors.” The SEC further notes that both the Securities Act and the Exchange Act specifically authorize it to adopt rules governing the disclosure of financial data through an issuer’s financial statements.
Citing to comments received during the notice and comment period, the SEC argues that climate-related disclosures are necessary to protect investors—and that such disclosures have become more important to investors as they have come to recognize the numerous effects climate-related risks can have on a company’s business and financial performance. To illustrate this point, the SEC points to how “climate-related natural disasters can damage assets;” “market-based transitions to lower carbon products, practices, and services can lead to material changes in a company’s business model or strategy;” and “changes in law, regulation, or policy may prompt companies to transition to lower carbon products, practices, and services.”
Furthermore, the Climate Rules are necessary, the SEC argues, because existing climate-related disclosures are “inconsistent, difficult to compare, and often boilerplate.” As a result, investors have “incurred costs and inefficiencies when attempting to assess climate-related risks and their effect on the valuation of a registrant’s securities.” The SEC points to broad support from investors for “more reliable, consistent and comparable information on how climate-related risks can impact companies’ operations and financial condition,” as evidenced by multiple surveys and academic studies.
Acknowledging that climate change has been the subject of public discourse, the SEC contends that the petitioners have mischaracterized the Climate Rules and that the rules do not implicate the major questions doctrine, which is reserved for “extraordinary cases” in which an agency asserts “an unheralded power representing a transformative expansion in [its] regulatory authority” by means of “a radical or fundamental change to a statutory scheme.”
“This case is not about [regulating] climate change or environmental policy; it is about protecting investors,” the SEC argues, while directing the Court to the final Climate Rules where it repeatedly states it is “agnostic as to whether and how issuers manage climate-related risks so long as they appropriately inform investors of material risks.”
According to the SEC, the Climate Rules are intended “not to influence companies’ approaches to climate-related risks or to protect the environment, but to advance traditional securities law objectives of facilitating informed investment and voting decisions.” The Climate Rules do not require companies to take any specific action or to engage in any oversight or management of climate-related risks, and no disclosure is required of companies that do not do so. In addition, the rules “do not ‘prescribe any particular tools, strategies, or practices with respect to climate-related risk.’”
Pointing to over 90 years of disclosure-based regulation by the agency, the SEC notes that since 1970, it has, from time to time, adopted rules and guidance requiring disclosure of certain environmental matters when it determines the information would be important to a reasonable investor.
Lastly, the SEC argues that the Climate Rules do not violate the nondelegation doctrine, as the Securities Act and the Exchange Act “‘clearly delineate’ the ‘boundaries’ of the authority Congress delegated to the [SEC] as well as the ‘general policy’ that [Congress] intended the Commission to pursue”—namely the implementation of disclosure “necessary or appropriate in the public interest or for the protection of investors.”
Did the SEC act reasonably in adopting each of the Climate Rules? Did the SEC reasonably assess the Climate Rules’ economic effects, and did it satisfy the APA’s procedural requirements?
In its brief, the SEC maintains that the Climate Rules satisfy the APA, noting that they were subject to a “rigorous notice-and-comment process” and that in response to these comments, the SEC modified its proposed rules “to make the required disclosures more useful to investors and less costly” by, among other things, “[adding] materiality qualifiers, and limiting most of the disclosures to circumstances in which the issuer determines—based on its own circumstances—that there is a substantial likelihood that a reasonable investor would consider the information important to their investment and voting decisions.” Specifically, the SEC points to how it “pared back the disclosures required in an issuer’s financial statements and significantly reduced the required greenhouse gas emissions disclosures, adding an express materiality qualifier and eliminating the disclosures commenters identified as the most costly and difficult to ascertain—Scope 3 disclosures.”
The SEC also asserts that it “carefully considered both the benefits and costs of the [Climate] Rules, including their effect on efficiency, competition and capital formation.” While recognizing the burdens of the disclosures required by the Climate Rules, the Commission found that “those burdens are justified by the informational benefits of the disclosures to investors.” According to the Commission, “the Climate Rules ‘should have positive effects on market efficiency’ because the required disclosures about climate-related risks will enable investors and other market participants to ‘better evaluate registrants and make more informed investment and voting decisions,’ thus ‘reducing information asymmetry and mispricing in the market, improving market efficiency.’”
Are SEC’s Climate Rules consistent with the First Amendment?
The SEC maintains that the Climate Rules are consistent with the First Amendment, arguing that the Climate Rules should be subject to the lesser First Amendment scrutiny applied to commercial disclosure requirements. In support of its argument, the SEC notes how the Supreme Court has repeatedly upheld laws in the commercial speech context where the required disclosure is of “factual and uncontroversial information” and the law is “reasonably related to an adequate government interest and not unjustifiably or unduly burdensome on protected expression.”
The Climate Rules require “purely factual disclosures,” the SEC argues, and the required disclosures are uncontroversial, because issuers are only required to disclose factual objective information and are not required to “take sides in a heated political controversy,” “convey a message fundamentally at odds with [their] mission,” or to “opine on connections between weather events and global climate change.”
Amicus briefs filed in support of Climate Rules
Numerous consumer advocacy, environmental, investor and academic groups, attorney generals and former SEC officials filed amicus briefs on August 15 defending the Climate Rules; articulating the SEC’s authority to adopt them; and contending that climate-related financial risks are real, disclosure is needed, and the rules are not unduly burdensome.
Takeaways
Setting aside for the moment any First Amendment concerns, the question for the Eighth Circuit will boil down to whether the broad authority granted under the Securities Act and Exchange Act is sufficient to authorize the SEC’s adoption of the Climate Rules. As the SEC notes in its brief, for over 90 years it has promulgated disclosure rules aimed at protecting investors.
We do not know how the Eighth Circuit will rule, and it currently seems likely that, regardless of how the Eighth Circuit rules, the Court’s decision will be appealed to the U.S. Supreme Court.
In the meantime, companies should prepare themselves for the possibility that the Climate Rules will become effective one day, whether in their current state or in some pared-back form. (Learn more about how to prepare.)
If they haven’t already, companies should begin the process of allocating resources and, where necessary, engaging outside consultants and counsel to aid them in assessing the new disclosure obligations, including carbon accounting and related analyses, reporting climate data and establishing systems and controls for the collection, and reporting and assurance of climate data. Companies should also review the Climate Rules to identify any gaps and ensure they are prepared to provide the disclosures required by the rules.
While the future of the SEC’s Climate Rules remains uncertain, companies should prepare themselves for climate disclosure more generally, be it in response to the Climate Rules, the California climate disclosure laws (which are themselves subject to litigation, and potential amendment) or other state laws, global regulations, including those currently in effect in the European Union and those being adopted in other countries worldwide (which are generally broader than the Climate Rules), and/or investor and stakeholder demands.
Also published by the Harvard Law School Forum on Corporate Governance.