SEC Defends its Climate Disclosure Rule in Court

The U.S. Securities and Exchange Commission launched a defense in court of its new climate reporting rule, arguing that the proposed disclosures in the rule provide “information directly relevant to the value of investments,” and that it is within the Commission’s authority to mandate climate risk disclosures.

In a brief filed this week with the U.S. Eighth Circuit Court of Appeals, the Commission reiterated its view that “climate-related risks and a public company’s response to those risks can significantly affect a company’s financial performance and position,” yet current reporting on these risks are “inconsistent,” and “difficult to compare,” impeding the ability of investors to make decisions.

The SEC announced the release and adoption of the new rules in early March, 2 years following the Commission’s initial draft release, establishing for the first time requirements for public companies in the U.S. to provide disclosure on climate risks facing their businesses, plans to address those risks, the financial impact of severe weather events, and, in some cases, greenhouse gas emissions originating from their operations.

The rule faced a series of legal challenges immediately following its release, with nine court petitions filed within 10 days, including a lawsuit against the rule filed by 25 Republican state attorneys general, led by Iowa AG Brenna Bird, and another appeals court motion requesting a stay of the rules led by the U.S. Chamber of Commerce.

Arguments against the rules claimed that the requirements are too onerous and expensive for companies, that the information requested, including GHG emissions data, is not reliable or overly speculative, and that the rules exceed the SEC’s authority.

The petitions were subsequently consolidated in the Eighth Circuit court, and the SEC announced in April that it would pause the implementation of the climate disclosure rule pending a review of the legal petitions, but noting that it planned to “continue vigorously defending” the new disclosure requirements.

In its filings, the Commission outlined its decision to adopt the new climate disclosure rule, highlighting a need for “more detailed, consistent, and comparable information,” and “substantial investor demand,” citing investor feedback, for climate-related information to help inform investment and voting decisions.

The Commission also addresses the claims that the costs to comply with the new rules would be too burdensome for companies, detailing its considerations on economic effects of the rules, including the costs as well as the expected impacts on efficiency, competition, and capital formation, and noting that it even modified the rules from the initial 2022 proposal “to make the required disclosures more useful to investors and less costly.”

The brief also addressed arguments that the SEC does not have the authority to require climate-related disclosures, noting that “Congress granted the Commission authority to require disclosure of information important to investors’ investment and voting decisions,” arguing that “each disclosure requirement in the Rules is designed to elicit information that is important to informed investment and voting decisions.”