SEC delays climate disclosure rule implementation amid legal challenges

The US Securities and Exchange Commission (SEC) has officially put its climate disclosure rule on pause following a raft of lawsuits arguing that climate regulation exceeds the agency’s authority.

The SEC approved its final rule on March 6, after two years of intense debate that led to a significant backtrack from the initial draft. For example, a requirement to disclose Scope 3 emissions was removed entirely, and the scope of operational (Scope 1 and 2) emissions reporting was also reduced.

The rule was set to be phased in from 2025, but in the month since its publication, it has been the object of at least nine lawsuits from Republican states, energy companies and industry associations seeking to block its implementation – one of which stated that “the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion”. 

SEC decision aims to avoid regulatory uncertainty

This week, less than a month after passing the rule, the SEC officially stayed its disclosure regulation pending the results of these legal challenges, which were consolidated at the end of March and will now be considered at the conservative-leaning 8th U.S. Circuit Court of Appeals in St Louis, Missouri.

“In issuing a stay, the Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions. Thus, the Commission will continue vigorously defending the Final Rules’ validity in court and looks forward to expeditious resolution of the litigation,” the document explains.

However, the SEC decided to use its discretion to stay the rules to facilitate the “orderly judicial resolution of those challenges” and avoid regulatory uncertainty should the judicial process extend beyond the rule’s planned implementation date.

“Disappointing but not surprising”

Reacting to the news on Linkedin, David Carlin, founder of sustainability consultancy Cambium and Head of Risk at the United Nations Environment Programme Finance Initiative, worried the move would “only embolden the vehement anti-ESG activists who have been challenging all forms of climate policy and action”.

“Disappointing but sadly not surprising: The SEC Climate Disclosure Rule has been paused. This ongoing fight is hurting US companies through the lack of regulatory alignment between the US and other jurisdictions, and harming investors by depriving them of relevant information that would enable them to responsibly allocate their capital,” he added.

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.