The ongoing legal battle surrounding the US Securities and Exchange Commission’s (SEC) climate risk disclosure rule has captured the attention of a wide array of stakeholders, ranging from former SEC officials to institutional investors and advocacy groups, as critical deadlines loom. At the heart of this dispute is the question of whether the SEC possesses the power to mandate that publicly traded companies divulge specific climate-related risks, such as greenhouse gas emissions and the potential repercussions of climate change.
The rule itself forms part of the SEC’s broader initiative to ensure that companies disclose material risks to their investors, particularly those linked to climate change. The SEC’s rationale for the rule is grounded in the belief that climate risks equate to financial risks, and investors have a right to access this information to facilitate informed decision-making. Nevertheless, the rule has sparked intense debate and now stands as the focal point of a legal showdown.
As part of the litigation process, a flurry of amicus briefs, or “friends of the court” filings, were submitted by various stakeholders ahead of the September 2024 deadline. These filings play a crucial role in shaping the court’s comprehension of the broader implications of the rule and its potential ramifications. Noteworthy among these filings is one from 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 collective brief, these legal experts contend that the climate disclosure rule aligns with longstanding laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934, which grant the SEC the authority to mandate disclosures deemed essential to safeguard investors and serve the public interest.
The brief underscores that the SEC has, over decades, mandated disclosures concerning environmental issues without encountering significant legal challenges. The scholars argue that climate risks squarely fall within the realm of financial risks historically regulated by the SEC. Given the substantial impact of climate change on specific industries, notably energy, agriculture, and real estate, proponents of the rule assert that investors require standardized and reliable data to evaluate these risks.
Supporters of the SEC’s climate risk disclosure rule encompass institutional investors overseeing more than $2 trillion in assets. Major public pension systems in states like California and New York have expressed their backing through a joint brief. According to these investors, the absence of standardized and comparable climate-related data has long been a deficiency in financial reporting, impeding their ability to assess the genuine risks and opportunities tied to climate change. They emphasize that climate risk disclosures are increasingly imperative in a landscape where numerous companies are pursuing decarbonization strategies.
With escalating investor demand for transparent, decision-useful information on how companies are managing their climate-related risks, advocates argue that the SEC’s rule could cultivate greater trust and efficiency in capital markets.
Despite robust support from certain quarters, the SEC’s climate disclosure rule has encountered staunch opposition from business groups, conservative advocacy organizations, and several states. The Business Roundtable, representing over 200 major US companies, stands out as one of the most vocal opponents. In their brief, they argue that while addressing climate risks is integral to good corporate governance, the SEC is overstepping by mandating these disclosures. They assert that such decisions should rest with company boards, best positioned to determine whether climate-related risks are material to their business.
Critics further argue that this requirement exceeds the agency’s legal authority and could establish a perilous precedent. Several conservative organizations and state officials have echoed these concerns, accusing the SEC of overstepping its legislative mandate. In a joint brief, critics contend that Congress has not empowered the SEC to regulate environmental matters, and by imposing this rule, the agency is encroaching into the realm of environmental regulation, a domain they believe should be reserved for entities like the Environmental Protection Agency (EPA). They maintain that the SEC’s actions constitute an unlawful expansion of its authority and should be invalidated.
The outcome of this legal battle is poised to have extensive implications, not solely for the SEC but for the future of corporate governance and climate risk management in the United States. The case has also underscored the broader trend of environmental, social, and governance (ESG) considerations assuming a more central role in business operations and investor decision-making. Legal expert Howard Sidman noted that the volume of filings underscores the significance of the SEC’s proposal and its potential impact on nearly all public companies.
Sidman suggested that the litigation’s effects might be limited for multinational corporations, noting that the European Union has already enacted stringent emissions disclosure requirements, with many global companies preparing for compliance. This development positions the EU as a leading global regulator for sustainability-related disclosures, overshadowing the potential influence of the SEC’s rule.
The next significant milestone in the litigation is slated for September 17, 2024, when the parties to the case submit their briefs. Given the complexity of the case and the multitude of filings, legal experts anticipate that several months may elapse before a final ruling is rendered. In the interim, the SEC has halted the implementation of its climate risk disclosure rule, citing regulatory uncertainty.
Ultimately, the case will determine whether the SEC possesses the authority to compel companies to disclose climate-related risks and, by extension, whether investors will have access to the information necessary for informed decision-making in an increasingly climate-conscious world.
