SEC climate disclosure rule faces uncertain future

The climate disclosure rule proposed by the US Securities and Exchange Commission (SEC) has become the subject of increasingly intense legal and political wrangling. Although the majority of public comments received by the SEC are broadly supportive of the plans, opponents have stepped up their efforts to have them blocked or scaled back.

With the rule due to be finalised by the end of 2022, a series of clashes will determine how the new regulations ultimately take shape.

Legal challenges on the horizon

A group of attorneys general from 24 Republican-controlled states wrote to the SEC last month, calling the climate disclosures plan “an ill-advised misadventure into environmental regulation”. They say the proposal amounts to the agency expressing policy preferences beyond its remit to protect investors and financial markets.

Fears that the rule could be struck down in the courts were given additional weight by a recent Supreme Court decision to curb the powers of the Environmental Protection Agency in regulating greenhouse gas emissions. Experts have warned that other regulatory initiatives could be subject to renewed legal challenges as a result.

“The basis for the decision is essentially applicable across all the regulatory agencies and we’d expect many actions by the SEC and other financial federal regulators to quickly become bullseyes for corporate America,” Dennis Kelleher, chief executive of Better Markets, told Reuters. The SEC climate rule was an obvious target for such litigation, he added.

Despite the apparent threat of legal challenges to the rule, there is an apparent reluctance among its proponents to engage with such attacks. A recently-published article in the National Law Review considers the public comments received by the SEC, finding that supporters of climate disclosure tend to focus on policy arguments rather than offering a legal justification. The authors warn that with critics dominating the discourse around the rule’s legality, its defenders may encounter difficulties in future court proceedings.

However, some powerful defences of the legality of the rule have been offered. George Georgiev, a law professor at Emory University, wrote earlier this year that there is nothing extraordinary about the proposals, describing them as firmly grounded within the traditional SEC disclosure framework. He said that, while companies’ climate disclosures would contain information of interest to a wide range of stakeholders, they are of clear relevance to investors in supporting financial decision-making – therefore locating them squarely within the purview of the SEC.

Georgiev pointed out that the rule draws on technical frameworks for financially-material disclosure developed by expert groups such as the Task Force on Climate-related Financial Disclosures, which counts investors, banks, ratings agencies and accounting firms among its members.

Companies and investors seek greater alignment with the ISSB

A large number of comments submitted to the SEC recommend that the agency take greater steps to align the disclosure rule with international standards, such as those currently being developed by the International Sustainability Standards Board (ISSB).

A letter from Unilever states that adoption of the ISSB baseline would provide investors with consistent, comparable and meaningful  data to inform their investment decisions.

“Whilst the SEC and ISSB climate reporting proposals are currently well aligned, explicit adoption of the ISSB baseline will also help to future-proof climate reporting since it is anticipated that ISSB standards will evolve over time based on materiality assessments and the SEC rules may evolve over time as well; this would mitigate the risk of future divergence in climate reporting requirements,” it argues.

According to the National Law Review, support for greater ISSB alignment was expressed in 76 responses to the SEC. The public consultation on the ISSB proposals closes on 29 July, and the board has said it intends to issue the new standards by the end of the year.

Remove scope 3 loopholes, SEC told

There is also significant support among respondents for expanding the indirect scope 3 emissions covered by the disclosure requirements. Under the current proposals, scope 3 disclosures would only be required if the company deems them to be material, or if the company had set an emissions target including them.

A letter from the New York State Insurance Fund (NYSIF) advises the SEC to make scope 3 disclosures more uniform and comprehensive across market participants, which it says is necessary to prevent the underreporting of valuable data. In particular, it criticises the provision to allow companies to determine whether emissions are material, saying they would be likely to draw different conclusions about the threshold at which reporting is necessary.

The NYSIF also says it is concerned about the SEC’s proposal to tie scope 3 disclosure to whether a company has emissions reduction targets or goals. It warns that this could disincentivise companies from setting such plans when doing so could trigger additional disclosure obligations.