SEC Climate Rules Risk Legal Battle with Environmental Groups

The SEC’s upcoming corporate climate disclosure rules face a new legal threat from environmentalists after Republicans and businesses have long signaled they would sue to stop the regulations.

The Sierra Club and Earthjustice are strongly considering suing the Securities and Exchange Commission, if the agency softens or abandons plans for big companies to disclose the Scope 3 emissions from their supply chains and other indirect sources under the new corporate reporting regime, three environmental advocates told Bloomberg Law.

The SEC has already received legal threats from business interests and about two dozen Republican state attorneys general for several months as it works to finalize the landmark rules as early as this spring. For the first time, companies would be required to report their greenhouse gas emissions and make other disclosures about how climate change affects their businesses in their 10-K annual filings to investors.

The Sierra Club has urged SEC officials to support the Scope 3 emissions reporting several times, according to agency records. The US Chamber of Commerce, American Petroleum Institute and officials from West Virginia, Florida and other GOP-led states have pushed the SEC to drop potential Scope 3 disclosures and broader elements of the SEC’s March 2022 climate proposal.

“It’s long overdue,” one of the advocates said of Scope 3 disclosures. “It’s the kind of information that smart investors are demanding.”

Spokespeople for the Sierra Club and Earthjustice declined to comment. An SEC representative didn’t respond to requests for comment.

‘Part of the Playbook’

The Sierra Club and Earthjustice are waiting until the SEC adopts rules before they finalize their legal strategy, said the advocates, who requested anonymity to discuss private conversations. The groups also are strongly considering defending the SEC in court against any Republican and business challenges over the agency’s climate disclosure rules—even if they sue the agency at the same time, the advocates said.

The Sierra Club has sued and defended an agency over a set of rules before.

The group in 2019 helped bring a lawsuit against the Environmental Protection Agency over Trump-era regulations that they said failed to adequately curb power plant emissions under the Clean Air Act. But the organization also helped defend the EPA in litigation that businesses brought that year challenging the agency’s power to adopt the rules.

Any litigation over the SEC’s climate rules still could be months away. The SEC is increasingly unlikely to finish the regulations this month, as the agency’s most recent agenda suggests. An earlier agenda contemplated a completion date of October 2022, before it was pushed back to April, making stakeholders think significant parts of the final rules are still undecided.

SEC Chair Gary Gensler has repeatedly declined to give a timeline for finishing the rules or discuss what changes the agency may make. But he told lawmakers in March that regulations usually take about 12 to 15 months to finalize after they’re proposed. June will mark 15 months since the agency issued the proposal.

The looming threat of litigation has forced the SEC to be especially careful about how it drafts the final rules, said Cynthia Williams, an Indiana University Maurer School of Law professor, who writes about securities law and corporate governance. The agency, however, is unlikely to find any solution that prevents all lawsuits, she said.

“In today’s political context, there’s almost nothing that most regulators can do where they can be assured they will not be sued,” Williams said. “It’s just part of the playbook.”

Don’t Back Down

The agency has had dozens of meetings with outside stakeholders to discuss the rule the past few months, according to SEC records. Several of the discussions focused on the SEC’s plans for big companies to disclose their Scope 3 emissions, if material to their businesses or part of their climate goals.

Sierra Club representatives in March met with several SEC officials, including Commissioner Caroline Crenshaw and Mika Morse, Gensler’s climate policy counsel, agency records show. The group last month also gave the SEC a law professor’s analysis that says that investors are increasingly relying on Scope 3 data to determine companies’ financial risk and progress toward emissions reductions.

“The SEC should not back down on requiring the disclosure of relevant Scope 3 emissions,” Madison Condon, a Boston University Law associate professor wrote in her analysis.

The Sierra Club and other environmental groups have said the SEC has the power and responsibility to require Scope 3 reporting and other disclosures about the effect of climate change on businesses. The US Chamber, API, West Virginia Attorney General Patrick Morrisey (R) and others have said the SEC doesn’t have the authority to compel climate reporting and would violate the Constitution, federal securities laws and other statutes.

The Chamber, for example, warned the SEC in a February letter that the proposal is “not the proper way to proceed,” reiterating questions it has about the agency’s statutory authority to issue the rules the commission proposed. The group has met at least four times with Gensler or his aides since December, according to agency records.

The SEC has proposed several climate disclosures beyond Scope 3 emissions, including plans to require companies to report on severe weather risks and Scopes 1 and 2 emissions concerning companies’ direct operations and power usage. Gensler has said the agency has the legal power to require the disclosures as it responds to investor demands for the information they consider to be material.

The SEC can require disclosures on issues like climate change under federal securities law, which seeks to ensure investors have high-quality information to make decisions on issues they find important, Williams said.

“The rule is well within the authority of the SEC,” she said.