Uncertain future for adopted SEC climate risk disclosure rule

The US Securities and Exchange Commission (SEC) has adopted its watered down climate risk disclosure rule in a disputed 3-2 vote, but its future remains uncertain in the face of legal challenges and increasing polarisation around ESG topics.

The final rule, set to be phased in from 2025, includes 12 climate-related disclosures, such as material climate-related risks, their impact on strategy, business model and outlook, mitigation spending, board oversight of climate-related risks and Scope 1 and/or 2 emissions deemed material.

It is a considerable step back from the initial draft, which included Scope 3 emissions and was generally much more closely aligned with the ISSB standards, Europe’s CSRD and California’s own climate disclosure regulations. 

Because of this departure – the result of more than 24,000 comments on the initial draft – observers believe the SEC’s adopted rule adds complexity to an already diverse global reporting landscape. “Executives and reporting teams will find themselves grappling with some tough questions in the years ahead; What will U.S. companies disclose in their reporting and when? Will they only focus on mandatory compliance disclosures, or will they consider adding information that they are reporting in other jurisdictions to satisfy investor demand?” wonders Andie Wood, Vice President, Regulatory Strategy at Workiva.

Conservatives are already challenging adopted SEC climate rule in court

Companies and their Chief Sustainability Officers are also likely to ask themselves how permanent this rule is, considering the fact that on the very day it was adopted, a coalition of 10 states already asked a court of appeals to strike it down, arguing that “the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion”. 

According to Brian O’Fahey, a partner in the corporate and finance team of Hogan Lovells in Washington DC, the current conservative majority in the Supreme Court means it’s not unlikely that the rule could be cancelled. 

“Six of nine members of the Supreme Court are conservative, and they have been very receptive to striking down governmental agency regulations in the past few years,” he tells CSO Futures. 

As an example in 2022, the Supreme Court limited the power of the Environmental Protection Agency in regulating greenhouse gas emissions from power plants by reviving the ‘major questions doctrine’, a dormant principle which presumes that Congress does not delegate rule-making to executive agencies.

“They’re making the argument that the agencies are going beyond their mandates, and regulating an area that Congress has not specifically authorised them to regulate. And that line of attack will no doubt be used against the SEC rules,” adds O’Fahey.

The scaling back of certain reporting requirements, including Scope 3 emissions disclosures, was partly done so the rules could withstand such legal challenges, but in a presidential election year when ESG issues are increasingly politicised, the newly adopted rules are anything but safe.

US Chief Sustainability Officers should prepare regardless

O’Fahey urges 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 take steps to keep up with the global climate reporting movement: build an internal sustainability governance structure and integrate climate risks into general risk management.

Other observers tend to agree, reminding US companies that climate reporting is evolving and being standardised regardless of the SEC’s rulemaking. 

“The biggest mistake that these organisations can make is to assume that they can pump the brakes on their environmental reporting efforts just because the SEC is pulling back on Scope 3,” warns Bill Harter, Principal ESG Solutions Advisor at Visual Lease, adding that “it’s important to remember that [the SEC is] not the only regulator in the game”.

At the end of the day, reporting on a company’s climate impact is fast becoming a matter of competitiveness, since investors are using this data to assess risk and allocate funding. “Companies that don't provide this information are not going to be as competitive as those who do because many investors are not going to be looking to invest in companies that don't have meaningful disclosure. And so, to compete in the marketplace, I think there is an incentive to want to voluntarily provide a lot of this information, whether or not it's mandated,” says O’Fahey.