ESG and SEC: Impact of the Judicial Review on the Final Rules for Climate-Related Disclosures

May 13, 2024
Publications

By Elizabeth Smith and Martha “Frannie” Reilly

As part of the Securities and Exchange Commission’s ongoing and evolving mission to enhance disclosures for investors, the SEC published final rules relating to climate-related disclosures for investors (final rules). When announcing the final rules on March 6, SEC Chair Gary Gensler stated, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.” Prior to adopting these final rules, the SEC reviewed more than 24,000 comment letters submitted in response to the proposed rules released in March 2022, according to the SEC’s press release on March 6.

During the public comment period, several parties filed petitions seeking judicial review of these new rules. These petitions were filed across six different circuits. On March 19, the SEC filed a notice of multicircuit petitions for review with the judicial panel on multidistrict litigation. On March 21, pursuant to 28 U.S.C. Section 2112(a)(3), the panel on multidistrict litigation issued an order consolidating the petitions for review in the U.S. Court of Appeals for the Eighth Circuit, which was selected via lottery system. The consolidated action includes petitions by:

19 state attorneys general;
The U.S. Chamber of Commerce; and
The Ohio Bureau of Workers’ Compensation, along with the state attorneys general of Kentucky and Tennessee

The petitions challenge the validity of the rules primarily on the following legal theories:

That the rules violate the APA because it is either arbitrary, capricious, an abuse of discretion, or otherwise in violation of the law; contrary to a constitutional right or power; in excess of an agency’s jurisdiction or authority; or issued without observance to procedural requirements;
That under the major questions doctrine Congress does not delegate issues of major political or economic significance to agencies without clear authorization and, therefore, the SEC does not have the authority to issue the rules;
That the Chevron doctrine is currently being reconsidered by the Supreme Court. The Chevron doctrine dictates that courts should defer to an agency’s reasonable interpretation of ambiguous statutes. However, should this doctrine be overturned, as many believe it will be, the court may be compelled to more stringently review the SEC’s final rules; and
That the final rules violate corporations’ right to free speech under the First Amendment.

Less than one month following the adoption of the final rules, the SEC announced that it would stay these final rules pending the completion of judicial review of the consolidated Eighth Circuit petitions.

As a result of this stay, public companies and their legal counsel are reviewing the final rules to determine what information may be required to be included in disclosures. Some public companies are moving toward a voluntary disclosure anticipating the release of these final rules while others are waiting to see the result of this Eighth Circuit judicial review.

As background, the final rules will require a public company to disclose the following climate-related information to investors and potential investors in accordance with the SEC’s March 6 press release:

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 are not otherwise exempted, information about material Scope 1 emissions or Scope 2 emissions;
For those required to disclose Scope 1 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% 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; and
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.

The parties have requested the Eighth Circuit to expedite the briefing schedule, which could lead to a decision in these cases as early as September. Additionally, the SEC’s voluntary stay of the rules will allow the Eighth Circuit to move more quickly to the merits of the case. However, any decision rendered by the Eighth Circuit could result in an appeal to the Supreme Court.

Pending the outcome of this judicial review and the SEC’s stay of these final rules, public companies and their legal counsel must consider whether to begin compiling this information in the event the stay is lifted. In addition to the outcome of the SEC litigation, companies that operate in multiple jurisdictions should also take into account recent, similar regulations being adopted by other states and countries, including California and the European Union (EU), in which those companies, or their capital providers, operate.

Martha “Frannie” Reilly is co-chair of the firm’s public finance and government services group and chair of the firm’s environmental, social and governance (ESG) group. Serving clients from Devon, she advises businesses of all sizes on the development and implementation of corporate policies, best practices and corporate governance and counsels clients on the use of ESG Bonds and Green Bonds to further their sustainability plans. She can be reached at freilly@mcneeslaw.com or 484-329-8036.

Libby Smith is a litigation attorney at the firm where she focuses her practice on contract disputes, injunction and noncompete litigation, and environmental, social, and governance (ESG) law. She can be reached at esmith@mcneeslaw.com and at 717-237-5404.