By: Alexandra Evarts
In a growing push for private industry to address its climate impact, the Securities and Exchange Commission (“SEC”) has proposed new requirements for public companies to disclose environmental, social, and governance (“ESG”) related information. The new rules, which were initially proposed in March 2022, will mandate public companies to provide certain climate-related financial data and greenhouse gas emissions insights in their public disclosure filings. In what experts call the greatest overhaul of ESG requirements in two decades, the new rules are expected to face several legal challenges, including whether they exceed the SEC’s rule-making authority under West Virginia v. EPA.
The SEC is responsible for protecting investors; it maintains fair, orderly, and efficient markets, and facilitates capital formation. One of the ways that the SEC does this is by requiring public companies to disclose detailed data about their financial performance and the risks they face on a yearly basis. By doing so, the SEC ensures that investors have timely, accurate, and complete information so that they can make confident and informed decisions about when or where to invest.
In March 2022, following increased demand from investors for information on the risks climate change-related events pose to business, the SEC proposed rule changes that would require public companies to include climate-related disclosures in initial registration as a public company with the SEC and in their ongoing annual reporting. The SEC points to the Securities Act of 1933 and the Securities Exchange Act of 1934 as the statutes granting the agency authority to compel disclosures that are “necessary or appropriate in the public interest or for the protection of investors.” The disclosures would include “information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements” and the company’s greenhouse gas emissions. The greenhouse gas emissions disclosures would be limited to “Scope 1” and “Scope 2” emissions, which include direct emissions and indirect emissions from purchased energy, but not “Scope 3,” which are emissions generated by a company’s suppliers and customers.
The final version of the rules, which are expected in 2023, have already received pushback from investors, industry groups, and Republicans. Investors have expressed concerns about high costs, complexity and potential unintended consequences of the reporting requirements, encouraging the SEC to consider changes to the rules. However, industry groups are seeking to prohibit the rules entirely through legal challenges, including challenging whether the SEC has the authority under West Virginia v. EPA to require such disclosures in the first place.
Relying on what the Supreme Court refers to as the Major Questions Doctrine, the holding in West Virginia v. EPA severely limits the authority of administrative agencies, such as the SEC, to adopt and enforce new regulation. If passed, opponents could argue that the SEC is relying on ambiguous statutory text to “claim a significant expansion of power in a subject matter in which it lacks.” Opponents to the rules have argued that implementing the climate disclosure policy would require “clear delegation” of authority from Congress. However, proponents of the new rules could argue that climate change is becoming such a major threat to the operational and financial success of companies that the disclosures are “necessary for the protection of investors.” Additionally, the greenhouse gas emissions that major corporations are responsible for are directly perpetuating the severity of climate change. Therefore, disclosures compelling greenhouse gas emissions information are necessary in the public interest.
It is yet to be seen how the SEC will respond to legal challenges to the proposed rules. While there has been discussion about softening the rules to please investors and industry stakeholders, no official decisions have been made. Until the rules are passed, which is expected in 2023, we will not have a clear view of the Court’s opinion about how the holding of West Virginia v. EPA applies.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
Student Bio: Allie Evarts is a second-year student at Suffolk University Law School. She is a staff writer for the Journal of High Technology Law. Allie worked at two technology startup companies prior to law school, and received a Bachelor of Science Degree in Environmental Science, with a concentration in Natural Resource Planning and Policy, from the University of Vermont.
