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

The U.S. Securities and Exchange CommissionReleased 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 yet under the Biden administration.

SEC Commissioner Allison Herren Lee was called it a “watershed moment for investors and financial markets.” It is also a win for President Joe Biden, whose Other climate efforts have failed. One year ago Biden appointedGary Gensler, chairman of the SEC, supports climate disclosures in principle.

The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, simultaneously strengthening both markets and the nation’s climate response.

The proposal still has a lot of work to do before it can bring about the transformational changes it hopes for. We are currently studying Climate regulation and business lawWe have closely followed the debates about the proposal. Here’s what you need to know.

What the rule would do

If the SEC votes to approve the rule after a public consultation period, it would standardize and extend the disclosure requirements that the SEC encouraged. In a 2010 guidance document.

As the Notice of 510 pages released on March 21, 2022, makes clear, companies would be expected to include a laundry list of items in their regular filings with the SEC: information on the company’s “oversight and governance of climate-related risks,” any expected climate-related risks it faces in the future, any transition plans the business has developed, and data on certain greenhouse gas emissions linked to the company’s operations, among other things.

Gensler said that Proposal draws fromThe approach of Task Force on Climate-Related Financial Disclosure, which many countries have adopted. However, the proposal is noticeably less strict than the European Union’s regulations.

In the leadup to the release of the SEC’s proposal, Both supporters and opponents speculatedScope 3 emissions would be required. Under the terms of the proposal, the answer is a resounding “maybe.”

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

While All companies registered would be required to disclose their own direct greenhouse emissions, such as emissions from manufacturing processes, as well as indirect emissions through the use of energy – Scopes 1 and 2, respectively – only some companies would need to report Scope 3 emissions under the proposal.

The proposal would exempt “Small reporting companies” from Scope 3 reporting. It would allow large companies to withhold Scope 3 emissions data when the company determines that the data are not “Material” to investors or if the company doesn’t have Scope 3 emissions targets or goals.

Public interest groups demanded that the SEC disclose even non-material Scope 3 emissions. Industry groups demanded that the SEC forgo any Scope 3 emissions mandate. The SEC seems to have split the baby.

It’s not over ‘til it’s over

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

First, the SEC will accept public comments on the proposal within the next 60 days. The agency received approximately 600 unique commentsIn its request for information prior to issuing the proposal. With more information available, there should be a lot more engagement. The Federal Communications Commission received almost 2,000 comments when it invited the public to comment on its proposal for net neutrality rules repeal. 22 million comments.

The SEC should expect to receive numerous comments from both opponents and public interest groups who want stricter regulations.

In accordance with the standard administrative law principlesThe SEC must then respond to any public comments or important arguments. This process could easily take half an year if it receives even a fraction the comments that the FCC received.

This process is designed to allow SEC to amend the terms of the proposal. It is not possible to change the proposalSo much that the public would have been unable to understand the final rule during the comments period.

The courts are still waiting

It is now easier to spot legal weaknesses once the rules are in place.

Industries are likely to take issue with the SEC’s estimates of the costs companies will face to comply with the rules. The SEC’s proposal states that the cost could be “relatively small” if companies already provide similar information. This assertion will be carefully defended by the SEC.

2011 was the year of the U.S. Court of Appeals, District of Columbia threw out an SEC RuleIt failed to properly consider the economic consequences of compliance. Despite This ruling has been widely criticisedIf a law does not require a cost-benefit analysis requirement, the The U.S. Supreme Court seems to be sympatheticTo fulfill such a requirement.

Another vulnerability will stem from the SEC’s approach to Scope 3 emissions.

Both industries and public interest groups are likely to argue that the SEC misunderstood its statutory authorization – either because It also included Scope 3 emissionsOr because it It was believed that it was limited to “material” emissions, respectively. Or, challengers might argue that the SEC failed to properly analyze policy considerations favoring another approach. It will be important to see how well the SEC responds when critics comment.

Finally, it is possible that the matter is out of the SEC’s hands. Some critics suggestThe regulation of climate disclosures, while too important for regulators, belongs to Congress. Courts have sometimes shown skepticism toward agency actions that present so-called “major questions,” including those related to Climate change.

If the courts see climate disclosure as a major problem, they might invalidate the rule, even if the SEC strongly supported its approach.

There is still a lot to do

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 often just the first offer in ongoing negotiations over the rule.