In a significant move back in mid-March, the Security and Exchange Commission (SEC) officially adopted rules that would have compelled large companies to disclose their Scope 1 and Scope 2 emissions as well as their climate risk as part of their financial due diligence. However, in early April, due to the mounting legal pressure and pushback from Republican lawmakers, the SEC voluntarily stayed these new rules, pending a final decision from the courts. Here’s what you need to know about the latest political wrangling around these rules.

What’s in the SEC Climate Rules?

The SEC's rules for climate-related disclosures were originally adopted on March 6 and were designed to enhance the consistency, comparability, and reliability of climate-related information provided by public companies. The rules aimed to respond to investor demands for better information on how climate-related risks impact businesses and how they are managed. The key aspects of these rules included requirements for companies to disclose material climate-related risks and their financial impacts, governance and management of such risks, and specific greenhouse gas (GHG) emissions data for larger companies. The watered-down rules only addressed Scope 1 and Scope 2 emissions, while the original plan, which included a phased-in approach to reporting Scope 3 emissions, was removed after heavy lobbying from a wide variety of opponents.

These rules were aimed at larger companies which tend to face more rigorous demands, including quicker filing deadlines for quarterly and annual reports. While the SEC had ambitious plans to force what they identify as “large accelerated filers,” or companies with a public float (the total value of the company’s shares held by the public) of $700 million or more, to more accurately disclose their environmental risks and impacts, the rules were significantly changed by the time they became final in early March.

The rules introduced a "materiality" threshold for disclosures, meaning that companies only needed to report information that is considered materially significant to investors. This approach aimed to prevent the overload of non-essential information. The SEC stripped out the Scope 3 emissions with the aim of addressing concerns from opponents about the extensive scope and potential burden of the earlier versions of the rule.

Moreover, a "safe harbor" provision was included to protect companies from legal liabilities associated with the forward-looking statements made in these disclosures. This is particularly relevant for statements about future climate-related plans like transition strategies and carbon pricing. As soon as the rules were finalized, a number of groups spoke out against them, promising legal threats and more.

Who is Suing to Change the SEC Rules?

The watered-down rules face legal challenges from all sides–both environmental activists and conservative Republican groups have piled on to change the rules.

In mid-March, a federal court temporarily halted the new rules, in a case brought by a pair of fracking companies: Liberty Energy and Nomad Proppant. According to the New York Times, the companies made the argument that, “There is no clear authority for the S.E.C. to effectively regulate the controversial issue of climate change.” Following the decision by the U.S. Court of Appeals for the Fifth Circuit, the SEC voluntarily decided to stay the rules until further legal clarity could be had.

The SEC is getting it from all sides, too.

Currently, environmental organizations like the Sierra Club and Earthjustice are suing the SEC for their rules, arguing that the required disclosures don’t go far enough. These groups are pushing for the reinstatement of Scope 3 emission reporting requirements. They argue that the final rule issued by the SEC fails to provide comprehensive and necessary information on greenhouse gas emissions, particularly the exclusion of Scope 3 emissions, and contend that such emissions are critical for assessing a company's overall climate impact. They also argue that the scaled-back requirements compromise investor's ability to make informed decisions regarding climate-related risks.

On the other side of the aisle sit a number of large corporate entities as well as ten conservative Republican states, suing the SEC to block the implementation of its new climate disclosure rules. This legal action is spearheaded by West Virginia Attorney General Patrick Morrisey, and includes states like Georgia, Alabama, and Alaska. These states are pushing back on the SEC, arguing that the rules impose “overly burdensome” requirements on companies to disclose climate-related information, which they believe extends beyond the SEC’s authority and effectively enacts environmental regulations through a backdoor. They claim that the rules would demand a significant amount of detailed material from companies, which they consider excessive and beyond what is necessary for investor decision-making. These states have filed their petition in the U.S. Court of Appeals for the 11th Circuit, challenging the constitutionality and the statutory basis of the SEC’s rules.

If that kind of argument sounds familiar, it should. It's similar to the one that conservatives are currently using to try and dismantle and undermine federal agencies like the Environmental Protection Agency or EPA, which enforces environmental regulations. The U.S. Supreme Court is currently weighing two cases that would have widespread implications for the EPA as well as other federal agencies and their ability to enforce regulations. The first case, Relentless, Inc v. Department of Commerce, could gut what’s known as the Chevron deference, which allows federal agencies to interpret and enforce laws that are meant to protect the public, environment, and consumers. The second, Loper Bright Enterprises v. Raimondo could determine whether or not to stay what’s known as EPA’s Good Neighbor Plan, which is supposed to prevent smog and pollution from one state from drifting into another. Both cases are on the Supreme Court’s docket this year and will be decided. The Verge has a great explainer and tick-tock on both if you’re interested in digging deeper. We also plan to keep a close eye on both of these and see where the conservative court comes down on the final decision, as both will have wide-reaching implications for climate change.

What Happens Now?

For now, the SEC rules are on hold, though some experts fully expect that many companies will begin efforts to comply with what exists in the rules currently. That’s because companies that do business in California and Europe, where emission disclosures are much stricter, will have to comply anyway. As this story at PBS points out, it does not make sense for companies to delay or bet on the outcome of the legal challenges, and most are already preparing to make these kinds of disclosures, regardless of the legal outcome.

We’ll continue to keep an eye on what happens with these legal challenges, but like most processes, the battle will likely be protracted and slow-moving.

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