WASHINGTON — The Securities and Exchange Commission Wednesday finalized a scaled-back version of climate-risk disclosure rules proposed in March 2022, eliciting bipartisan criticism deemed by proponents and opponents by turns as either insufficiently protective or excessively demanding.
Yet even with the reduced disclosure framework — which passed the commission by a 3-2 vote — industry experts foresee legal challenges and legislative efforts to undo the rule.
"We are increasingly dubious this rule will survive congressional and judicial review despite efforts by the SEC to narrow the proposal," said Jaret Seiberg, an analyst with TD Cowen, in a release.
The SEC
In the initial draft of the rules, large corporations would need to disclose both their own greenhouse gas emissions and those generated across their complete distribution networks. Under the final rule, companies will now only need to disclose emissions deemed materially significant to their business, a tangibly lower bar. The final rule also exempts small firms from reporting, whereas the original proposal required all publicly traded corporations to disclose their direct emissions.
Democratic lawmakers have advocated for comprehensive disclosure like that included in the original proposal, while industry groups — including banks — pushed back against the proposed Scope 3 emissions reporting, citing practical limitations.
Republican lawmakers, including Banking Committee Ranking Member Sen. Tim Scott, R-S.C., and
Sustainable investing advocates say the agency's decision to greenlight the final rules without the originally proposed clauses represents a significant departure from the original proposal and provides corporations with too much leeway.
Former SEC Commissioner Allison Herren Lee argued that the final rule undermines the original proposal's effectiveness in providing investors with vital information on climate risks.
Lee was an SEC commissioner from July 2019 until July 2022 during which she spent months as acting SEC Chair.
"The new rule, unfortunately, does little to prevent companies from making vague, untested and, most significantly, unsubstantiated statements about their carbon footprints," Lee — now with the whistleblower firm Kohn, Kohn & Colapinto — wrote following the finalization of the rule. "Under the new rule companies will not have to disclose the bulk (or in some cases any) of their GHG emissions."
Ceres President and CEO Mindy Lubber — who's organization advocates for sustainable leadership — believed while the rule falls short of the SEC's 2022 proposal, it could be the first step to address the longstanding demand from investors for transparency on climate-related financial risks.
"Consistent, comparable information on physical and transition climate-related risks is vital to decision-making around strategy and investments," Lubber wrote accompanying the rule's finalization. "The SEC's new rule will now mandate the disclosure of that information, giving investors much-needed insight on how companies are managing the material financial risks and opportunities presented by climate change."
While critics of the proposal argued the rule did not go far enough, corporate sustainability advocates like Carolyn Berkowitz, CEO of the Association of Corporate Citizenship Professionals, welcomed the regulatory clarity provided by the final rule.
"Today's long-awaited decision by the SEC to standardize climate-based reporting for U.S. listed companies will provide much needed clarity for our members who are leading corporate social impact teams and responsible for guiding companies to meet these new requirements," she said. "It lays out a clear path forward for corporate executives to develop sustainability programs that are fully funded and resourced in order to meet these new requirements."
McHenry — who has consistently criticized the SEC's proposal to require climate risk disclosure — said in a statement that the rule's goal is fundamentally outside of the agency's purview and was not placated by the industry concessions in the final rule and hinted that the rule might be legally fraught.
"The Securities and Exchange Commission is not a climate regulator," said McHenry. "The SEC must reissue it for public comment to satisfy the requirements under the Administrative Procedure Act."
The APA — which has governed regulatory procedure since 1946 —
Likewise, other SEC alumni like the agency's former Deputy General Counsel and Mercatus Center Senior Scholar
"The final rules create a special disclosure regime for a particular national policy issue with the aim of causing public companies to reduce their greenhouse gas emissions and use of fossil fuels," Vollmer wrote following the vote. "The final rules therefore diverge from the rulemaking authority Congress conferred on the securities regulator and will impose substantial new costs on reporting companies that exceed minor benefits."
Seiberg thinks the rule's finalization will embolden congressional opponents of the rule to raise multiple resolutions attempting to block the rule wielding the Congressional Review Act.
"We see both chambers passing the CRA resolution as it only needs a simple majority in the Senate. For moderate Democrats, this is a free vote as they know President Biden will veto the measure within days of it passing. It is why this should pass the Senate. We believe Congress will fail this summer to muster the two-thirds majority needed to overcome a veto."
As for legal challenges, Seiberg argues the U.S. Chamber of Commerce will sue over the rule — likely in the industry sympathetic Fifth Circuit. That alone could slow the rule, he said.
"A judge in the Fifth Circuit is likely to impose an injunction to block the rule while the litigation is proceeding [and] there could be an initial opinion before the election," he said. "We expect the SEC will lose at the trial court and appeals court as we expect these courts will conclude Congress did not expressly authorize the SEC to require this type of disclosure."
That could ultimately send the case to the Supreme Court, Seiberg said, which could decide the fate of the rule — unless there is a change in administration next year.
"If Biden wins, then the litigation seems likely to get to the justices [while] if Trump wins, it is less clear as SEC Chair Gary Gensler's term expires in 2026 [that] may not be long enough to fully litigate this case," Seiberg said.
