In a brief filed last week, the SEC asserted a climate disclosure rule it adopted in March 2024 is well within the scope of its statutory mandate, which allows it to require disclosures to facilitate informed investing.
The rule requires public companies to disclose their exposure to financially material climate information in their annual reports and registration statements, and was challenged by 25 states and a panoply of industry advocacy groups soon after it went into effect.
Following an order from the US Panel on Multidistrict Litigation, those claims were consolidated into one action and assigned to the 8th Circuit in a lottery comprising the circuits within which each lawsuit was originally filed.
Climate reporting
The rule’s opponents claim that the climate reporting requirements are focused on trivialities that relate little to a company’s profitability or risk exposure, and are too expensive and cumbersome to implement.
As such, the petitioners claim that the SEC is transgressing its statutory mandate by promulgating an arbitrary and capricious rule that has more to do with protecting the environment than protecting investors.
A related argument claims the agency is creating significant environmental policy that should be reserved for Congress under the major questions doctrine. Another constitutional argument against the rule claims that it intrudes on commercial speech protected by the First Amendment.
The rule was suspended in April pending resolution of the litigation.
The final rule, which the SEC adopted by a 3-2 vote, is a scaled-back version of a highly controversial one the SEC proposed in March 2022. After receiving a historic number of comments criticizing the rule’s expansiveness, the SEC dropped some of its most stringent reporting requirements.
However, the rule as it stands still requires a host of disclosures.
SEC fires back
The SEC has long claimed that the climate disclosure rule is about safeguarding investors from market instability caused by environmental damage and increasing transparency. Its brief asserted the rule is well within the scope of its statutory mandate, which allows it to require disclosures to facilitate informed investing.
“Contrary to petitioners’ arguments, the commission promulgated the rules not to influence companies’ approaches to climate-related risks or to protect the environment, but to advance traditional securities-law objectives of facilitating informed investment and voting decisions,” the agency stated.
The SEC also retorted that the rule does not tread into the realm of the “extraordinary cases” of vast economic and political significance contemplated by the major questions doctrine.
And it dismissed the First Amendment argument on the grounds that commercial speech does not carry the same protections as private speech, and that disclosure requirements require lesser scrutiny than prohibitions. It also claimed that the rule’s disclosure requirements were not overly expensive or burdensome.
The case enters uneasy waters in the wake of the Loper Bright decision. Its resolution will be a salient example of how far agencies can extend their rulemaking ability without the support of Chevron deference.
This legal battle rages as ESG investing becomes a point of controversy in American politics. Several states have moved to ban investment strategies for public funds that consider environmental or social factors, even if circumscribing financial risk is their goal.
