The SEC’s new climate disclosure rule is already facing legal challenges

A landmark climate disclosure rule adopted yesterday by the U.S. Securities and Exchange Commission (SEC) is already facing mounting legal and regulatory challenges. Ten states filed suit yesterday, shortly after the rule was finalized. Environmentalists also say they are considering challenging the rule.

If implemented, the SEC’s new rule would force large, publicly traded companies to disclose the risks they face from climate change and share partial information about their greenhouse gas emissions. It would lead to dramatically more transparency than in the past, but it would still paint an incomplete picture of a company’s carbon footprint, as companies would only be mandated to disclose some of their emissions.

Instead of appeasing everyone with a weaker rule, the SEC appears to be taking on both Republicans and climate activists

The final rule is a watered-down version of a proposal the SEC put forward in 2022 that drew a barrage of opposition from industry groups and anti-ESG Republicans. But instead of appeasing everyone with a weaker rule, the SEC appears to be taking on both Republicans and climate activists.

The coalition of ten states suing the SEC alleges that “the final rule exceeds the agency’s statutory authority and is otherwise arbitrary and capricious, an abuse of discretion, and inconsistent with the law.” It includes West Virginia, Virginia, Georgia, Alabama, Alaska, Indiana, New Hampshire, Oklahoma, South Carolina and Wyoming.

Republicans in Congress are also working to overturn the SEC’s new rule. Bloomberg Law reports. Representative Bill Huizenga (R-MI) and Senator Tim Scott (R-SC) are seeking to use a Congressional Review Act, an oversight tool that would allow Congress to overrule actions by federal agencies.

“Investors should realize that this SEC overreach will significantly harm our economy while simultaneously being a boon to special interests and far-left activists,” Huizenga said in a statement yesterday.

However, many environmentalists are also unhappy with the rule, saying it does not go far enough to address climate-related risks. The most controversial piece is whether companies should disclose how much pollution they cause through their supply chains and the end uses of their products. Although these are considered indirect emissions, they also typically represent the majority of a company’s carbon footprint. Trade groups, especially in banking and agriculture, strongly opposed this provision in the SEC’s original proposal. The SEC eventually dropped it, upsetting environmental groups.

The Sierra Club also said it was disappointed that the SEC’s final rule “eliminates key requirements for companies to quantify climate-related impacts on their assets and expenses in financial statements.” The group, represented by the nonprofit environmental law organization Earthjustice, said in a statement yesterday that it is “considering challenging the SEC’s arbitrary removal of key provisions from the final rule, while also taking action to strengthen the SEC’s authority to implement such a rule.”

“As an investor, we expect full transparency about the fundamentals of a company, especially climate-related risks that carry serious negative financial consequences. Without higher standards of accountability, companies can withhold critical information that prevents us from making informed investment decisions based on full due diligence,” Dan Chu, executive director of the Sierra Club Foundation, said in a statement.

SEC Chairman Gary Gensler stands by the compromises made in the new rule. “I believe today’s action is an important step for our U.S. capital markets,” he said in a statement yesterday. “These rules will improve the disclosures that investors rely on when making their investment decisions.”

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