ANALYSIS: A rock and a hard place: SEC climate disclosure rules face legal attacks from all sides

21 Mar 2024

Quantum Commodity Intelligence – A US appeals court may have temporarily paused new rules issued by the US Securities and Exchange Commission (SEC) requiring publicly listed companies to disclose climate-related risks, but experts say companies should not use this as an excuse to do nothing in the meantime.

Litigation on the SEC rules is no surprise to anyone, Allison Herren Lee, a former SEC commissioner and acting chair, told a webinar earlier this month organised by Persefoni, which provides analytics for carbon emissions measurement and reporting and for which Herren Lee is a Sustainability Advisory Board member.

“Some companies I think may take the position, ‘I'm going to wait and see what happens’. [But] I think that's a bit of a risky course to take,” she told the webinar. “At a minimum, I think you need to be expecting there to be certain pieces of the rule that would survive, even if some of it does get stripped down.”


Steve Soter, vice president and industry principal at Workiva which provides companies with a cloud-based reporting platform, went further. “I think standing by and waiting to see what happens with litigation for a company as a reason to not prepare would be catastrophically bad. I think that would be an enormous mistake,” he told the webinar.

“Why are we doing this exercise [SEC climate reporting] in the first place? Yes, it's now become an important regulatory exercise, but this has primarily been an investor communication exercise,” he said.

“I think the miss would be to put this all on the shelf and say, well, I don't have to do that simply because it's no longer required from a regulatory standpoint. The opportunity is to have this communication with investors, and investors are asking and looking and prioritising,” he added.

The lawsuit that has brought the temporary pause was taken by Liberty Energy and Nomad Proppant Services, but also included the states of Texas, Louisiana, and Mississippi, as well as the US Chamber of Commerce in the list of petitioners.

“There is no clear authority for the SEC to regulate the controversial issue of climate change effectively," the two oilfield services firms wrote in their petition to the United States Court of Appeals for the Fifth Circuit.

The two companies said the SEC rules are “arbitrary and capricious”, adding that the requirements breach the First Amendment, which protects free speech, by “effectively mandating discussions about climate change”.

In addition, 11 US states have vowed to oppose the final rules, which were delayed by about a year amid opposition from many US boardrooms, especially in the oil and gas sector.

But SEC is facing another wave of litigation, not from industry concerned about complying, but from green groups that are unhappy with how the final regulations have been ‘watered down’ in their view.

On March 13, NGO the Sierra Club and the Sierra Club Foundation, represented by non-profit public interest environmental law organisation Earthjustice, filed a lawsuit against SEC in the US Court of Appeals for the DC Circuit.

“While the SEC's final climate disclosure rule will provide investors with some much needed information, the Commission's arbitrary decision to remove robust emissions disclosure requirements and other key elements from the proposed rule falls short of what the law requires,” said Ben Jealous, executive director of the Sierra Club, in a statement.

“Through legal action, we hope to ensure that all investors, including the Sierra Club and its members, have the information they need to evaluate companies’ climate-related risks, make smart investment decisions, and protect their assets for decades to come,” he said.

More legal action

And Sierra Club is not the only green group taking action, with the Natural Resources Defense Council filing a petition against SEC’s climate regulations in the US Court of Appeals for the Second Circuit in New York on March 12.

“What’s wrong with this rule is that it needs to do much more. Investors have been pressing for mandatory disclosure of greenhouse gas emissions, and the agency needs to give them a fuller picture of companies’ risk exposure,” said NRDC director of financial regulation and climate risk Elizabeth Derbes on the day the SEC regulation was approved.

The double-edge to the litigation being taken against SEC on its climate disclosure rules marks the first time the organisation has faced such action from two separate sides.

“I don't think the SEC has ever had that happen before, where they've been sued on both sides of an issue. And that's going to tax their resources double,” said Herren Lee, who is also ‘Of Counsel’ at Washington, DC-based law firm Kohn, Kohn & Colapinto.

“But what it does do, is potentially orient firms to think, we don't know which direction this is going, and we should probably prepare on a going-forward basis for some of it to survive,” she told the Persefoni webinar.

As it stands, the SEC regulations may not go as far as some would have liked, but are a “step in the right direction”, said Ben Rattenbury, VP policy at UK-based carbon ratings agency Sylvera.

“Broadly speaking, the rules will help to drive greater transparency, build trust and channel investment to those companies taking positive climate action. In particular, enhanced carbon credit disclosures will bring greater clarity to voluntary carbon markets, allow more informed investment decision-making and heighten the focus on quality,” he said.

“With price transparency often the missing piece of the puzzle, the new rules will accelerate a price-quality correlation, empowering buyers to have a stronger sense of value in their purchasing decisions. Greater disclosure will also bring deeper scrutiny and companies will need to be ready with better, defensible data to provide assurance on credit quality,” he added.

“There will be more enhanced reporting required by regulatory requirement through the SEC and none of it is shocking. It's not unduly onerous,” said Lisa DeMarco, a senior partner and CEO at Canada-based law firm Resilient and former chair of emissions trading trade group IETA.

She also believes that the rules bring certainty, and so if implemented would see less opportunity for lawsuits against companies challenging their corporate climate claims.

“This provides some predictability and certainty as to what is required… So they're not taking a creative interpretation of what we think might be required at some point in time. I'm quite hopeful that this will decrease the amount of complaints that are coming forward, particularly after a period of time.”

ESG ratings provider MSCI agreed. “The requirement will not, however, catch all companies off guard. A majority of US-listed companies in emissions-intensive sectors like utilities, materials and energy are already disclosing their scope 1 and 2 emissions, as are companies in consumer staples,” said Mathew Lee, a senior associate at MSCI Research in a blog on March 8.

“The SEC’s rules would standardise the obligation to disclose such emissions sector-wide but could also help to bring consistency and comparability to those disclosures.”