Changing climate

Will the US Supreme Court kill the new climate disclosure rules? Richard Carpenter gets technical.

This Summer, Investor Relations Officers (IROs) at some US-listed companies were madly preparing to provide a raft of new climate disclosures – but then put down their pens.

That’s because the US Securities and Exchange Commission (SEC) may want public companies to report on greenhouse-gas emissions and other environmental metrics, but a Supreme Court with a newly conservative majority could scuttle the agency’s plans.

In late June, the Supreme Court let fly with a series of controversial, blockbuster rulings. Not surprisingly, the one rolling back abortion rights and Roe v. Wade dominated the headlines.

For public companies, though, another attention-getting decision was West Virginia vs. Environmental Protection Agency (EPA). The six-to-three ruling limited the EPA’s authority to act on climate change by striking down an Obama-era rule that curtailed carbon emissions from power plants.

Soon after the decision, speculation began swirling that similar judicial reasoning might put paid to the SEC’s proposed climate-disclosure regulation.

The reasons why the Supreme Court’s recent ruling could fell the new climate-change disclosure rules are admittedly technical and fraught with legalese. In a nutshell, the Environmental Protect Agency’s decision hinged on the ‘major question doctrine,’ which says that federal agencies (such as the EPA and the SEC) need explicit direction from Congress before implementing regulations with significant political and economic implications.

The decision elicited shock because the ‘major question doctrine’ has rarely been invoked. Instead, it’s been common practice for courts to defer to the expertise of the agencies themselves. The June ruling by a far more activist Supreme Court seems to indicate that going forward, all bets are off when it comes to landmark regulations by federal agencies.

What’s in the proposed regulations?

Released in March 2022, the regulation would require companies listed on US stock exchanges to disclose material climate risks, including the greenhouse gas emissions that they directly or indirectly cause.

To see the proposed rules, go to https://www.sec.gov/rules/proposed/2022/33-11042.pdf.

Although many hailed the SEC proposal as an important step for greater investor protection, any new disclosure requirements mean more work for public companies. With work comes cost. And with cost comes controversy.

In addition, with Neil Gorsuch, Brett Kavanaugh, and Amy Coney Barrett on the Supreme Court bench, there’s a six-justice conservative majority, shifting the balance of power. In a July 1, 2022, article, for instance, the New York Times calls this ‘the most conservative Supreme Court in nearly a century.’

Whether the SEC is challenged on its proposed climate-change regulation may hinge on how burdensome the new rules are perceived to be.

The SEC has noted that not all companies would bear a heavy disclosure burden. In fact, SEC Chairman Gary Gensler said that the agency’s staff found that one-third of the nearly 7,000 annual reports submitted in 2019 and 2020 already included some disclosure about climate change. https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321.

What are experts saying?

According to a report by rating agency Sustainable Fitch, the recent Supreme Court decision could put a crimp in the SEC’s plans for heightened climate disclosure.

‘As the SEC’s proposed climate disclosure rules are far-reaching—they would apply to all publicly-listed companies and require detailed disclosure… increasing compliance costs and potentially affecting asset values and companies’ risk profiles – it is feasible that the court would view the matter in terms of the major question doctrine.’

And a July 12^th editorial in the Wall Street Journal urged the SEC to retract and rethink its planned disclosure rule. The piece argues that ‘The SEC’s proposed climate disclosure rule would expand its authority in a way that is almost indistinguishable from the EPA’s failed attempt to seize more power than it was due.’

Arguments in favor of relaxing the SEC’s proposed regulation predate the Supreme Court’s ruling. The US Chamber of Commerce, the Bank Policy Institute, the National Association of Manufacturers, and the American Petroleum Institute all publicly commented to the SEC, asking that the regulation be made more lenient.

Different strokes

Meanwhile, others believe that the SEC’s proposed regulation is different enough from the EPA’s actions that it might be enacted without legal challenge. The SEC was careful to base new requirements on old legislation: the Securities Acts of 1933 and 1934. The SEC’s argument that certain climate-change disclosures are now material is therefore arguably different from the mandates under the EPA’s Clean Power Plan that the Supreme Court just ruled against.

For now, IROs and sustainability officers at US-listed companies are in wait-and-see mode.

Having a moment to take stock is not necessarily a negative, though. Institutional investors and the ESG community have called for more specifics in terms of climate-change disclosures for quite some time. For companies keen to heed that call, the SEC’s proposed regulation serves as a roadmap for what stronger environmental disclosures would look like, whether or not an actual regulatory mandate comes to pass.