A court challenge was widely expected after the US securities regulator imposed a long-anticipated rule on company climate risks. In the event, the first lawsuit was filed in two hours.
Ten US states petitioned to vacate the rule, accusing the Securities and Exchange Commission of overstepping its statutory authority as it finalised a policy on Wednesday that requires companies to disclose some data on their emissions and other climate-related risks.
The first litigation is unlikely to be the last, pointing to what is likely to be a contentious future for the SEC’s first formal rule attempting to address companies’ role in and exposure to the perils of global warming.
“Federal agencies, and very specifically the SEC . . . need to stick to the statutory mandate that Congress gave them and avoid manipulating private actors for the sake of progressive policy,” Patrick Morrisey, West Virginia’s attorney-general, told reporters after his state and others including Alabama and Georgia, filed their case.
The climate rule is among the cornerstones of the SEC’s agenda under chair Gary Gensler, who has steered the agency’s biggest regulatory blitz since the 2008 global financial crisis. It aims to provide investors with more consistent, reliable and comparable climate disclosures.
The final rule was scaled back from a proposal that was far more ambitious when unveiled in March 2022. It has been criticised across the political spectrum, either for doing too much or too little to address companies’ exposure to climate change. SEC commissioners voted 3-2 along partisan lines to pass the measure.
“I’ve been a securities lawyer for three decades,” said Allison Herren Lee, a former SEC commissioner. “I am unaware of a rule where the SEC was sued on both sides of it. But I think that is a likely outcome here.”
Republicans and business groups argue the regulator does not have the authority to issue climate-related rules, which they warn will burden market participants.
Tim Scott, the top Republican on the Senate banking committee, in a statement said the rule “does far more to advance the Biden administration’s far-left climate agenda than uphold the SEC’s mandate”.
The US Chamber of Commerce defined it as a “novel and complicated rule that will likely have significant impact on businesses and their investors”.
Some Democrats praised the SEC’s move. Sherrod Brown, the Senate banking committee’s chair, described it as “a thoughtful approach to climate risk disclosure”.
But in dropping some of the more stringent disclosure requirements, the SEC has angered some progressive Democrats and climate campaigners.
Elizabeth Warren, a Democratic senator for Massachusetts, called the directive “the bare minimum”. “I am deeply disappointed by Chair Gensler’s decision to significantly weaken the rule in response to an onslaught of corporate lobbying,” she said in a statement.
Even the Democratic SEC appointees who voted for the rule on Wednesday, including Gensler, said more needed to be done. “Today’s rule is better for investors than no rule at all,” said commissioner Caroline Crenshaw. “But while it has my vote, it does not have my unencumbered support.”
The regulator had initially proposed that public companies’ annual reports include data on their direct emissions and those derived from energy that they purchase, respectively known as “scope 1” and “scope 2” emissions.
The original proposal’s most controversial disclosure involved so-called scope 3 emissions, a broader measurement that includes products a company buys from third parties, business travel and the end use of goods sold by the company.
But the final version of the rule abandoned any reporting requirement for scope 3 emissions and limited scope 1 and scope 2 disclosures only to emissions deemed “material” for larger SEC-registered businesses.
The agency said it had received comments that raised concerns around compliance costs of scope 3 reporting and whether current means of data collection could provide consistent and reliable disclosures.
“There may be things that future commissions take up, but I think this is the appropriate step at this time,” Gensler said, given nearly 60 per cent of Russell 1000 index companies are already providing information on greenhouse gas emissions.
Nonetheless, the SEC now faces the prospect of several lawsuits stemming from petitioners with diametrically opposed views.
The agency’s rollbacks could trigger challenges from climate groups. The Sierra Club and Earthjustice said they were weighing up taking legal action against the SEC for not going far enough to protect investors but added that they would also take action to defend its authority to implement the rule.
Meanwhile, the US Chamber of Commerce said it would use tools “including litigation if necessary, to prevent government over-reach and preserve a competitive capital market system”.
Gensler said the SEC looked to “not just the written law, but how courts interpret those written laws and I think that’s what we’ve done right here”. Speaking about the states’ lawsuit filed on Wednesday, an SEC spokesperson said: “The commission undertakes rulemaking consistent with its authorities and laws governing the administrative process and will vigorously defend the final climate risk disclosure rules in court.”
The potential lawsuits come as the SEC faces pro-business judges in higher courts. The Supreme Court in 2022 issued a landmark ruling that curbed the Environmental Protection Agency’s power to regulate greenhouse gas emissions, handing a win to the state of West Virginia, which is now targeting the SEC. “Some of the lessons that we’ve learned from [the EPA] case . . . are very relevant here,” Morissey said.
The climate rule adds to an expanding global regulatory regime for corporate climate reporting. In Europe, the Corporate Sustainability Reporting Directive requires big companies to prepare environmental, social and governance information, applying more onerous climate disclosures than the SEC.
In the US, California last year adopted its own climate disclosure requirements for companies that include scope 3 emissions.
California “took a bit of the punch out of the SEC’s rule”, said Erik Mohn, a vice-president for sustainability at Schneider Electric, adding that most North American companies would need to comply with the state’s directive. “If there was a surprise over the last 12 months, [it’s] maybe California moving so fast and getting out ahead of the SEC.”
For all the noise, some argue pushback was inevitable for a rule that generated 24,000 public comments and marks the first SEC directive specifically targeted at climate disclosures.
“No matter where this came down, you were going to have a lot of unhappy people,” said Michael Littenberg, partner at Ropes & Gray. “The controversy . . . that’s been going on for the last two years was not going to end when we got the final rule. [It] will continue and maybe even heat up now that there is something concrete for people to shoot at.”
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