The SEC proposes far-reaching climate disclosure rules for companies — here’s where the rules may be vulnerable to legal challenges

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Daniel E. Walters, Penn State and William M. Manson, Penn State

(THE CONVERSATION) The U.S. Securities and Exchange Commission has released its long-awaited proposal to require companies to disclose their climate risks to investors, and it’s arguably the most significant action on climate change so far. day under the Biden administration.

SEC Commissioner Allison Herren Lee called it “a watershed moment for investors and financial markets.” It’s also a win for President Joe Biden, whose other climate efforts have struggled. A year ago, Biden appointed an SEC chairman, Gary Gensler, who supports climate disclosures in principle.

The proposed requirements, when finalized, could help climate-conscious investors direct their money more precisely to companies that are responding to climate risks, simultaneously strengthening markets and the country’s climate response.

But the proposal still has a long way to go before it can deliver the transformative changes it seeks. We study climate regulation and business law and have closely followed the debates on the proposal. Here’s what you need to know.

What would the ruler do

If the SEC votes to finalize the rule after a public comment period, it would standardize, expand and mandate the disclosure requirements that the SEC encouraged in a guidance document in 2010.

As the 510-page notice published on March 21, 2022 makes clear, companies should include a long list of items in their regular filings with the SEC: information on “climate risk oversight and governance of the company. the climate-related risks it will face in the future, the transition plans the company has developed, and data on certain greenhouse gas emissions related to the company’s operations, among others.

Gensler said the proposal draws on the Task Force’s approach to climate-related financial disclosure, which several countries have adopted. But the proposal is still significantly less stringent than EU regulations.

In the lead up to the release of the SEC proposal, proponents and opponents alike have speculated about the need for so-called Scope 3 shows. Under the terms of the proposal, the answer is a resounding “maybe”.

A company’s Scope 3 emissions result from the activities of third parties, such as emissions produced by its suppliers or, ultimately, by its consumers. As the SEC pointed out, these emissions can “represent the majority of many companies’ carbon footprints.”

While all registered companies would be required to disclose their own direct greenhouse gas emissions, such as emissions from manufacturing processes, as well as indirect emissions from energy use – scope 1 and 2, respectively – only certain companies would have to report Scope 3 emissions under the proposal.

The proposal would exempt “small reporting companies” from Scope 3 reporting. This would allow large companies to withhold Scope 3 emissions data when they determine the data is not “material” for investors or if the company does not have Scope 3 emissions targets or targets.

Public interest groups wanted the SEC to require disclosure even of non-material Scope 3 emissions, while industry groups lobbied for the SEC to waive any Scope 3 emissions mandate. the baby.

It’s not over until it’s over

The SEC’s proposal kicks off what can be a perilous process of public scrutiny before the rule goes into effect.

First, the SEC will receive public comments on the proposal for the next 60 days. The agency received about 600 unique comments in its request for information before publishing the proposal. Now, with more details available, there should be a lot more engagement. When the Federal Communications Commission collected public comment on its proposal to roll back net neutrality rules, it received nearly 22 million comments.

The SEC should expect to receive many comments from opponents of any regulation and from public interest groups who want stricter regulation.

Under standard principles of administrative law, the SEC must review and respond to all material arguments or data presented by public commentators. If he gets even a fraction of the comments received by the FCC, this process could easily take six months.

By design, this process is supposed to allow the SEC to change the terms of the proposal, although it cannot change the proposal to such an extent that the public would not have understood during the comment period what would make the final rule.

The courts are on the lookout

Now that the terms of the proposed rule are in place, it is easier to see where the legal vulnerabilities might lie.

Industries are likely to dispute SEC estimates of the costs companies will face to comply with the rules. The SEC’s proposal says the cost could be “relatively low” if companies already provide similar information. The SEC will have to defend this assertion carefully.

In 2011, the United States Court of Appeals for the District of Columbia rejected an SEC rule on the grounds that it did not sufficiently consider the economic costs of compliance. Although this decision has been widely criticized for imposing a cost-benefit analysis requirement that is not required by law, the United States Supreme Court appears to favor such a requirement.

Another vulnerability will arise from the SEC’s approach to Scope 3 issuances.

Industry and public interest groups are likely to argue that the SEC misunderstood its legal authorization – either because it included Scope 3 emissions or because it thought it was limited. to “material” emissions, respectively. Or the challengers could argue that the SEC has not fully analyzed the policy considerations favoring a different approach. How the SEC responds to critical comments will be important when courts are called upon to decide whether the SEC acted arbitrarily, capriciously, or unlawfully.

Finally, it is possible that the case is not in the hands of the SEC. Some critics have suggested that regulating climate disclosures is too big a matter for regulators to belong to Congress. Courts have sometimes been skeptical of the actions of agencies that present so-called “major issues,” including those related to climate change.

If the courts see climate disclosure as a major issue, they can strike down the rule even though the SEC has strongly backed its approach.

a long way to go

The SEC has taken a major step that could boost the Biden administration’s climate change agenda, but whether it will be able to navigate a treacherous administrative and legal process without changing its approach remains to be seen.

The notice of proposed rulemaking is usually only the opening offer for an ongoing negotiation on the rule.

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