Climate groups drop lawsuits seeking stricter climate disclosures to support SEC against anti-ESG challenges

Two environmental groups that had filed a petition to review the US Securities and Exchange Commission’s “weakened” climate disclosure rule have dropped their cases to support the SEC against legal challenges from conservative and anti-ESG states.

The SEC published its long-awaited climate disclosure rule on March 6 and was almost immediately challenged in court by energy companies and a coalition of conservative states that recently passed a number of ‘anti-ESG’ laws aiming to prevent investors from taking sustainability into account in portfolio management. 

But the final rule was also criticised by environmental groups, which deplored the removal of significant parts of the initial draft, including the Scope 3 emissions disclosures. On March 13, 2024, the Sierra Club, represented by Earthjustice, and the Natural Resources Defense Council (NRDC) filed two separate lawsuits arguing that the final requirements would be insufficient to help investors manage climate risks within their portfolios.

At the time, Ben Jealous, Executive Director of the Sierra Club hoped that legal action would “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."

Defending the SEC’s authority on climate-related financial risks

But last week, both the Sierra Club and NRDC asked the court to dismiss their cases – seemingly to support the SEC against mounting legal challenges from conservative states and energy companies seeking to cancel the rules altogether.

They explained that they have now decided to focus their resources on “advocating for improvements to climate-related financial disclosures” outside of court. In addition, the Sierra Club noted that it plans to support “efforts to defend the SEC’s fundamental authority to require disclosure of climate-based risks” – a clear reference to conservative groups’ argument that the disclosure rule is beyond the financial regulator’s authority.

The SEC has faced growing anti-ESG backlash in recent months: in January, it was forced to withdraw a proposal to introduce a new ‘natural asset company’ class on the New York Stock Exchange (NYSE), which aimed to make nature conservation profitable by placing a monetary value on ecosystem services.

Consolidated lawsuits from Republican states

At least nine conservative legal challenges against the climate rule were consolidated at the end of March and will now be considered at the 8th US Circuit Court of Appeals in St Louis, Missouri – a favoured venue for Republican states and business groups.

As a result, the SEC decided in April to stay the climate rule “pending judicial review”, effectively delaying its implementation, which was meant to start in 2025.

Most legal experts do not expect the SEC climate rule to survive these legal challenges intact, though over half of them believe parts of it will be maintained. 

Speaking to CSO Futures in March, Brian O’Fahey, a partner in the corporate and finance team of Hogan Lovells in Washington DC, urged Chief Sustainability Officers not to “get too focused on the daily back and forth regarding the US rules and whether or not they ultimately survive”, and instead to take steps to keep up with the global climate reporting movement, including ISSB and Europe’s CSRD.