An Assessment of the Mounting Legal Challenges to the Sec's New Climate Disclosure Rule

• Publication year: 2024
• Citation: Vol. 4 No. 3

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Jacob Hupart and Will McKitterick ^*

Abstract: The SEC spent over two years preparing its final climate disclosure rule, the first significant federal regulation of its kind. The regulation mandates companies disclose information concerning climate-related risk, greenhouse gas emissions, and even the impact of severe weather events on their operations. And while the final rule is less robust than the SEC's initial draft, it has nonetheless elicited an outpouring of criticism from a range of entities on both sides of the political spectrum. Mounting opposition to this rule has left many wondering whether and when they will need to comply with the new regulation, and what this regulation will ultimately demand. In this article, the authors detail the various challenges emerging in Congress and the courts and offer certain practical advice to reporting entities confronting burgeoning regulation in this space

Introduction

On March 6, 2024, the Securities and Exchange Commission (SEC) issued a final rule concerning climate change disclosures, entitled "The Enhancement and Standardization of Climate-Related Disclosures for Investors" (the Rule). ¹ The historic Rule was adopted after a 3-2 vote following nearly two years of public debate. According to the SEC, who announced a draft version of the Rule on March 21, 2022, the regulation is an attempt to "advance consistent, clear, intelligible, comparable and accurate disclosure of climate-related financial risk," a relatively new area of focus for the Commission. ²

Demand for climate-related disclosures from market participants has grown over the past several years as investors increasingly

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incorporate environmental, social, and governance (ESG) information into their capital allocation decisions. Businesses themselves are also beginning to acknowledge that climate risk is a consideration when making oversight, investment, capital allocation, and other strategic decisions. In turn, regulators at the state, international, and federal levels have begun to mandate climate-related disclosures. The SEC's rulemaking marks the first significant national effort in the United States to require such reporting.

Among its key provisions, the Rule would require public registrants to:

■ disclose material climate-related risks, as well as registrant's efforts to ameliorate or adapt to such challenges;
■ report Scope 1 and Scope 2 greenhouse gas (GHG) emissions;
■ discuss the effects of severe weather events and other natural conditions on financial statements, including costs and losses resulting from these occurrences; and
■ describe directors' oversight of climate-related risks, including whether and how board committees or subcommittees are responsible for managing such risks and how information about events is reported to such groups. ³

This final iteration represents a somewhat pared-back version of the initial draft Rule, promulgated in 2022. These edits likely stemmed from the significant criticism the SEC received during the Rule's notice and comment period. The SEC received nearly 25,000 public comments from a range of individuals and organizations representing corporate, public, and environmental interests, mainly divided along ideological lines. On the left, commenters praised the Rule's aims while pushing the SEC to broaden its scope. On the right, critics challenged the rationale for the Rule as well as its cost to reporting entities. There were also certain comments—mainly from major corporations—that accepted the contours of the rule, agreed that a national regulation was beneficial for the sake of efficiency, yet critiqued particular aspects of the draft Rule. The SEC appears to have addressed some of this criticism as it made several adjustments to the final version, carving out exemptions for

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certain types of filers and eliminating the Scope 3 GHG emission reporting requirement entirely.

Congressional Challenges Signal Climate Disclosures Are Now a Partisan Issue

Despite the concessions made by the SEC in connection with the contents of the final Rule, conservatives have only expanded efforts to block the Rule's implementation, including by threatening passage of a recently proposed Congressional disapproval bill in Congress and through a barrage of litigation challenging the Rule's validity.

On April 17, the Chairman of the House Financial Services Committee, Congressman Patrick McHenry (R-NC), held a hearing entitled "Beyond Scope: How the SEC's Climate Rule Threatens American Markets," which reiterated many typical conservative criticisms of the Rule. McHenry characterized the regulation as "catastrophic for our markets and American competitiveness." ⁴ An associated committee report remarked that, "[d]espite modifications made to the initial proposal," the "new requirements will increase public companies' compliance costs, add complexity to their operations, and subject them to increased litigation risk." ⁵ The hearing also featured criticism from past high-ranking SEC officials, including Robert Strebbins, former general counsel with the SEC, and Ed Roisman, former Commissioner and Acting Chairman of the SEC, who warned that "compliance with the requirements will be a major undertaking for many public companies."

Accompanying this testimony, the House Financial Services Committee advanced a Congressional Review Act (CRA) ⁶ resolution challenging the Rule. If passed, the two-page resolution would effectively render the Rule null and void, overturning the regulation. The resolution, introduced on April 9 by Representative Bill Huizenga (R-MI) and 21 co-sponsors from the Committee, was followed shortly thereafter by the introduction of companion legislation in the Senate by Senator Tim Scott (R-SC), who serves as the ranking Republican of the Senate Banking, Housing, and Urban Affairs Committee. ⁷ Scott's proposal received the backing of 34 other senators, including 10 Republican members who serve

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with Scott on the Banking Committee, and one notable Democrat, Senator Joe Manchin (D-WV). Scott had previously announced his intention to use the CRA process to challenge the Rule shortly after its passage, which he described as part of Democrats' "partisan climate agenda on American businesses." ⁸

This CRA resolution has the potential to pass both the House and Senate, particularly if several House and Senate Democrats join ranks with Manchin to oppose the Rule. According to a study by the Brookings Institute conducted in 2021, a total of 249 resolutions were introduced between the enactment of the CRA in 1996 and October 2022, when the study was conducted. ⁹ The report notes, however, that these resolutions are relatively unlikely to be signed into law, although they have become more common in recent years. In the first two decades of the CRA's existence...