Consideration of the SEC’s long anticipated climate disclosure rules—the “Enhancement and Standardization of Climate-Related Disclosures for Investors”—is finally on the SEC’s open meeting agenda for March 6. There have been lots of rumors about the timing and the contents of the final rule, so now we’ll actually have the opportunity to see what the SEC has settled on. (For discussions of the substance of the proposal, see this PubCo post, this PubCo post and this PubCo post.) Stay tuned.
You’ll remember that one of the most striking rumors, courtesy of Reuters, has been that the SEC is indeed planning to eliminate some of the more controversial requirements in the proposal, notably the mandate to disclose Scope 3 GHG emissions in some cases. Scope 3 emissions result from the activities of third parties in the company’s “value chain,” making collection of the data much more difficult and much less reliable. (See this PubCo post.) While some contend that disclosure of Scope 3 is critical because it typically represents a large proportion of companies’ carbon footprints, Scope 3 requirements have come under fire from many quarters. In particular, concerns have been raised about how the requirement might affect private companies in the value chain, especially the agricultural community. However, both the EU rules and new California legislation mandate Scope 3 disclosure (see this PubCo post). Of course, we won’t know until Wednesday whether that rumor is accurate.
Another facet of the proposal that has come in for substantial criticism is the complex set of proposed changes to Reg S-X that would require a company to disclose in a note to its audited financial statements specified disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items. The proposed rules would require a 1% disclosure threshold. According to this article in the WSJ, SEC officials were “taken aback by the strength of opposition to their financial-reporting proposals, people close to the agency said. Many companies said the changes would bring high costs, complexity and potential unintended consequences.” We’ll have to see whether that requirement remains in the final rules. (See this PubCo post.)
One reason for cutting back on these requirements—if they are indeed cut back—may be the concern of some SEC officials that a sweeping set of disclosure requirements, including Scope 3, might be an invitation for litigation. Those concerns may have been exacerbated by the recent SCOTUS decision giving its imprimatur to the “major questions” doctrine in West Virginia v EPA (see this PubCo post), not to mention the recent string of successful court challenges to SEC rules, including the stock repurchase rules (see this PubCo post) and, just last week, the proxy advisor rules (see this PubCo post). In addition, questions regarding the scope of authority of the administrative state in general are under review by SCOTUS in the recent cases regarding Chevron deference. (See this PubCo post.) Critics—both corporate and political—have disputed the SEC’s authority to adopt the proposed climate disclosure rules and have raised First Amendment concerns. (See this PubCo post, this PubCo post and this PubCo post.)
Of course, paring down the proposal doesn’t necessarily eliminate the litigation threat entirely. According to Bloomberg, “West Virginia could be first in line to take on the SEC. [T]he state’s attorney general…threatened to sue the SEC over the rules before they were even proposed. Mandatory disclosures on climate change and other environmental, social and governance issues would violate companies’ First Amendment rights, he told the agency in a 2021 letter.” West Virginia v. EPA, he observed to Bloomberg in 2022, “makes it very hard for the SEC to require any corporate climate disclosures….Scope 3 is only part of the problem, he said. ‘The more they want to withdraw from this, we say, Thank you, and we will be pleased to limit the scope of our litigation against them….’”
The March timing of the vote should allow the SEC to escape jeopardy under the Congressional Review Act. The CRA allows both houses of Congress to nullify a recently adopted rule by passing a joint resolution that is signed by the president, but it would become available as a practical matter in this case only if the GOP were to win the White House and majorities in Congress this fall. The CRA is applicable to rules (and even some guidance) that were finalized by the executive branch and sent to Congress in the previous 60 “legislative days.” However, there is also a reset mechanism that can complicate the calculation. (See this PubCo post.)
The clock could still affect the defense of any litigation challenging new rules. If the climate disclosure rules were adopted at this meeting, any litigation that might be commenced shortly thereafter is unlikely to be resolved by 2025. If Republicans were to win the presidency in 2024 and take control of the SEC in January 2025, Bloomberg has posited, a “Republican-led SEC would have the power to end its defense of the rule,” although environmental organizations could step in to defend the rule.
