The ongoing litigation over the US Securities and Exchange Commission’s (SEC) climate risk disclosure rule has attracted widespread attention from a broad range of stakeholders, from former SEC officials to institutional investors and advocacy groups, as key deadlines approach. This legal battle is pivotal in determining whether the SEC has the authority to mandate that publicly traded companies disclose specific climate-related risks, such as greenhouse gas emissions and the potential impacts of climate change.
The rule itself is part of the SEC’s broader push to ensure that companies report material risks to their investors, particularly those linked to climate change. The SEC’s justification for the rule is rooted in the notion that climate risks represent financial risks, and investors have a right to access this information in order to make informed decisions. However, the rule has sparked significant debate and has now led to a legal showdown.
The Legal Tug-of-War Over Climate Risk Disclosures
As part of the litigation process, a slew of amicus briefs, or “friends of the court” filings, were submitted by various stakeholders ahead of the September 2024 deadline. These filings are critical to shaping the court’s understanding of the broader implications of the rule and its potential consequences.
Among the most notable filings is one by 25 legal scholars specializing in securities law, along with eight former SEC chairs, commissioners, and division directors, spanning both Democratic and Republican administrations.
In their joint brief, these legal experts argue that the climate disclosure rule is consistent with long-standing laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws grant the SEC the authority to require disclosures deemed necessary to protect investors and serve the public interest.
The brief points out that the SEC has, for decades, mandated disclosures related to environmental issues without significant legal challenges. The scholars contend that climate risks fall squarely within the purview of financial risks that the SEC has historically regulated.
Given the material impact of climate change on certain industries, particularly energy, agriculture, and real estate, proponents of the rule argue that investors need standardized and reliable data to assess these risks.
Investor Support for the SEC Rule
Supporters of the SEC’s climate risk disclosure rule include institutional investors managing more than $2 trillion in assets. Major public pension systems in states like California and New York have voiced their support through a joint brief.
According to these investors, the lack of standardized and comparable climate-related data has long been a gap in financial reporting, hindering their ability to assess the true risks and opportunities associated with climate change. They also highlight that climate risk disclosures are increasingly necessary in a world where many companies are pursuing decarbonization strategies.Â
With growing investor demand for transparent, decision-useful information on how companies are managing their climate-related risks, proponents argue that the SEC’s rule could help foster greater trust and efficiency in capital markets.
Opposition and Criticism
Despite the strong support from some quarters, the SEC’s climate disclosure rule has been met with fierce opposition from business groups, conservative advocacy organizations, and several states. The Business Roundtable, which represents over 200 major US companies, has been one of the most vocal opponents.Â
In their brief, they argue that while good corporate governance includes addressing climate risks, the SEC is overreaching by mandating these disclosures. They contend that such decisions should be left to company boards, which are in the best position to determine whether climate-related risks are material to their business. They further argue that this requirement goes beyond the agency’s legal authority and could set a dangerous precedent.
Several conservative organizations and state officials have echoed these concerns, accusing the SEC of acting beyond its legislative mandate.
In a joint brief, critics argue that Congress has not authorized the SEC to regulate environmental matters and that by imposing this rule, the agency is stepping into the realm of environmental regulation, which should be reserved for other bodies, such as the Environmental Protection Agency (EPA). They assert that the SEC’s actions amount to an unlawful expansion of its authority and should be struck down.
The Broader ImplicationsÂ
The outcome of this legal battle is likely to have far-reaching implications. It will not be just for the SEC but for the future of corporate governance and climate risk management in the United States. The case has also highlighted the broader trend of environmental, social, and governance (ESG) considerations becoming more central to business operations and investor decision-making.
A legal expert, Howard Sidman, noted that the volume of filings reflects the significance of the SEC’s proposal. He also pointed out that the rule would affect nearly all public companies, which explains the breadth of interest in the case.Â
However, Sidman suggested that the impact of the litigation might be limited for multinational corporations. He observed that the European Union has already implemented stringent emissions disclosure requirements, which many global companies are preparing to comply with. This development positions the EU as a leading global regulator for sustainability-related disclosures, overshadowing the potential influence of the SEC’s rule.
What Comes Next?
The next major milestone in the litigation will occur on September 17, 2024, when the parties to the case file their briefs. Given the complexity of the case and the volume of filings, legal experts predict that it could take several months before a final ruling is issued.
In the meantime, the SEC has paused the implementation of its climate risk disclosure rule, citing regulatory uncertainty. Ultimately, the case will determine whether the SEC has the authority to compel companies to disclose climate-related risks and, by extension, whether investors will have access to the information they need to make informed decisions in an increasingly climate-conscious world.