As the U.S. Securities and Exchange Commission (SEC) has seen in promulgating its Climate Disclosure Rule, you can’t please everyone.

The latest twist in the legal challenges the regulation has faced came from the U.S. Chamber of Commerce, which offered to defend the SEC against claims from environmental groups that say the final rule doesn’t go far enough.

This is ironic considering the Chamber filed suit in March against the SEC over the rule, which, according to Reuters, seeks to “standardize climate-related company disclosures about greenhouse gas (GHG) emissions, weather-related risks and how they are preparing for the transition to a low-carbon economy.”

Background

In March 2022, the SEC proposed rule changes to require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas (GHG) emissions.

As proposed, the rule called for registrants to disclose information about their direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, as proposed, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3).

Scaled-back final rule

On March 6, 2024, the SEC passed more narrow rules than originally proposed.

“The [National Association of Manufacturers (NAM)] demonstrated for the SEC the practical realities of such a sweeping proposed rule, encouraging the SEC to make significant changes to remove inflexible and infeasible mandates, require disclosure only of material information and protect small manufacturers from the impact of these requirements,” states a Chamber Business News post. “Among other critical issues, the NAM called on the SEC to remove the rule’s onerous and unworkable Scope 3 supply chain emissions reporting mandate—which the SEC has now done,” NAM President and CEO Jay Timmons says.

“For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth, and legality of the SEC’s climate disclosure efforts,” the Chamber post notes. “We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact. While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The Chamber will continue to use all the tools at our disposal, including litigation, if necessary, to prevent government overreach and preserve a competitive capital market system,” said Tom Quaadman, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness executive vice president, in the Chamber’s post.

The SEC final rule modified the disclosures for Scope 1 and Scope 2 emissions so that only larger companies must furnish this data if deemed material. The requirement for Scope 3 emissions disclosures was entirely removed from the final rule after the SEC reviewed more than 24,000 letters received during the comment period when the proposed rule was initially published.

Final rule requirements

According to the SEC press release, the final rule requires registrants to disclose:

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook.
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities.
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk, including the use, if any, of transition plans, scenario analysis, or internal carbon prices.
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks.
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal.
• For large accelerated filers (LAFs) and accelerated filers (AFs) that aren’t otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions.
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level.
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable 1 percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements.
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Legal challenges

“Despite its narrower scope than originally proposed, the rule could still face a legal challenge from industry that it violates the ‘major questions’ doctrine, which the Supreme Court cited in West Virginia v. EPA, a 2022 ruling that curbed EPA’s ability to regulate [GHG] emissions from coal-fired power plants and that requires Congress to give agencies permission to adopt policies of significant political or economic consequence,” the Chamber post states.

Both the Sierra Club and the Sierra Club Foundation, represented by Earthjustice, filed suit against the SEC on March 13, 2024, claiming the final rule is too weak.

“In its final rule, the SEC capitulated to industry lobbyists by rolling back emissions disclosure requirements,” a Sierra Club press release says. “The final rule arbitrarily removed Scope 3 emissions disclosure requirements, which were included in the proposed rule and supported by 97% of investor comments, and weakened Scope 1 and 2 emissions disclosure requirements. Scope 3 emissions, which result from a company’s supply chains and the use of its products, account for the largest share of most companies’ [GHG] emissions, particularly for the most polluting industries.

“Investors need complete information about a company’s exposure to climate-related financial risks through a full accounting of their [GHG] emissions [to] better determine whether a company’s business practices align with their transition plans and/or emissions reduction targets. The final rule removes this requirement and may open investors to misleading and incomplete information.”

In the latest twist of the SEC climate change reporting rule, the Chamber recently filed a motion to intervene in the cases brought by the environmental groups “to defend those portions of the final rule that refrained from imposing the additional disclosure requirements the environmental groups would have this Court require the SEC to impose,” reports Cooley PubCo. “It’s worth noting here that the Chamber is not alone in its efforts to intervene. The attorneys general and other officials of various states—Arizona, Connecticut, Colorado, Delaware, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, Washington, Wisconsin and D.C.—have filed a motion to intervene as respondents in the consolidated case to defend the SEC’s rules against all petitioners because these states ‘have a substantial interest in defending the Final Rule, which provides the States, their residents, and other investors with information about climate-related risks that is critical to making informed investment decisions.’”