SEC Lawsuit
Ten states are seeking Court intervention to invalidate the SEC’s new climate rule, which requires companies to report GHG emissions.
The Securities and Exchange Commission recently adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.
The U.S. Securities and Exchange Commission approved a rule requiring some public companies to report their greenhouse gas emissions and climate risks on March 6, 2024, after last-minute revisions that weakened the disclosure rule in the face of intense company opposition.
Publicly traded companies must include more information in their financial statements about the risks climate change poses to their operations and their contributions to the problem. However, the approved version was weaker than an earlier draft, and the changes were not made public until the March 6 meeting.
The new disclosure rule was among the most anticipated in recent years by the nation’s top financial regulators. Over a two-year process, it drew more than 24,000 comments from companies, auditors, legislators, and trade groups. It brings the U.S. closer to the European Union and in line with California, which moved ahead earlier with corporate climate disclosure rules.
The narrowed rule does not include requirements for companies to report some indirect emissions, known as Scope 3. Those do not come from a company or its operations but happen along its supply chain. For example, in the production of the fabrics that make a retailer’s clothing or are a result of a consumer using a product, such as gasoline.
Companies, business groups, and others fiercely opposed requiring Scope 3 emissions, arguing that quantifying such emissions would be difficult, especially if information was obtained from international suppliers or private companies.
West Virginia Attorney General Patrick Morrisey announced his part in a 10-state coalition suing the U.S. Securities and Exchange Commission to thwart its new rule requiring companies to report greenhouse gas emissions.
Morrisey predicted the new SEC rule would “make it virtually impossible for companies to calculate how their environmental impact is material. How is a company supposed to know if greenhouse gas emissions will affect its finances? How many trucks are going to be too many?”
The Attorneys General of West Virginia, Georgia, Alabama, Alaska, Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming, and Virginia filed a petition for review. This issue remains a hot topic on both sides of the aisle in Congress. The new rules sparked immediate backlash from business groups and republicans who have long opposed the change. Although the final rule rolled back a provision that would have required companies to report emissions that stem from their supply chains and products, it could face additional legal challenges.
Given the challenges and litigation that the SEC faces, it plans to announce a new effective date once the litigation is concluded and the rules are accepted.
In Congress on April 10, 2024, House Republicans introduced a bill seeking to nullify the SEC rules. A joint resolution by Republicans invokes the Congressional Review Act to disapprove and reject the SEC rule. The House Financial Services Committee voted along party lines to advance this effort on April 17, 2024. Currently, there is no suggestion that the Senate would examine or pass this resolution.
Written by Pavel A. Glazunov, Esq.
