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SEC proposes sweeping climate disclosure rules for companies – here’s where rules can be vulnerable to regulatory challenges


Truck at the gas station. The SEC’s proposed rules include some reporting on so-called Scope 3 emissions, in companies’ supply chains and the use of their products.

Daniel E. Walters, Penn State and William M. Manson, Penn State

America Securities and Exchange Commission release it long-awaited proposal requires companies to disclose their climate risks to investors, and is arguably the single most important action on climate change under the Biden administration.

SEC Commissioner Allison Herren Lee called it’s a “critical moment for investors and financial markets.” This is also a win for President Joe Biden, who Other climate efforts have struggled. A year ago, Biden Appointment SEC Chairman, Gary Gensler, advocates climate claims in principle.

The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money toward businesses that are responding to climate risks, while strengthening the market as a whole. environment and the nation’s climate response.

But the proposal has a long way to go before it can produce the transformative changes it aims to be. We learned climate regulation and business law and has been closely monitoring the debate over the proposal. Here’s what you need to know.

What will the rule do?

If the SEC votes to finalize the rule after a period of public comment, it will standardize, expand, and mandate the disclosure requirements that the SEC encourages. in a guide in 2010.

As Announcement is 510 pages long released on March 21, 2022, makes it clear that companies will have to include laundry items listings in their regular filings with the SEC: information on “monitoring and managing risks” climate-related” of the company, any climate-related risks. it faces in the future, any transformation plans the business has developed and data on certain greenhouse gas emissions associated with its operations, among other things.

Gensler said proposal drawn from ‘s approach Task Force on Climate-Related Financial Disclosure, which some countries have adopted. But the proposal is still significantly less stringent than Regulations of the European Union.

Before making the SEC’s proposal, supporters and opponents of speculation about whether so-called Scope 3 emissions are required. Under the terms of the proposal, the answer is a resounding “maybe”.

A company’s Scope 3 emissions are the result of third-party activities, such as emissions generated by its suppliers or ultimately by consumers. As The SEC pointed outThese emissions may “represent the bulk of carbon emissions for many companies.”

When all registered companies will be required disclose their own direct greenhouse gas emissions, such as those from manufacturing processes, as well as indirect emissions through energy use – Scope 1 and 2 respectively – only a few companies need to report Scope 3 emissions as proposed.

The proposal will exempt”small reporting companies“From the Scope 3 report. It will allow large companies to retain Scope 3 emissions data when the company determines that the data is not”material“For investors or if the company does not have a Scope 3 emission target or target.

Public interest groups want the SEC to require even non-physical Scope 3 emissions disclosures, while industry groups push for the SEC to drop all Scope 3 emissions regulations. The SEC appears to have split turn the child.

It’s not over until it’s over

The SEC proposal initiates what could be a dangerous public review process before the rule goes into effect.

First, the SEC will solicit public comments on the proposal over the next 60 days. The agency received approx 600 unique comments in a request for information before making a proposal. Now, with more details available, there will be essentially more engagement. When the Federal Communications Commission solicited public comments on a proposal to roll back the net neutrality rules, it received almost 22 million comments.

The SEC would expect a wide range of comments from opponents of any regulation and public interest groups wanting more stringent regulations.

According to standard administrative law principles, the SEC is required to review and respond to any material arguments or data presented by public commenters. If it received even a fraction of the comments received by the FCC, the process could easily take half a year.

By design, this process is supposed to allow the SEC to change the terms of the proposal, even though it proposal cannot be changed so much so that the public won’t be able to understand during comment period what the final rule will do.

The courts are waiting

Now that the terms of the proposed rule are in place, it’s easier to see where legal loopholes may be.

Industries may take issue with the SEC’s estimate of the costs companies will face to comply with the rules. SEC’s Proposal says the cost could be “relatively small” if companies had provided similar information. The SEC will have to defend that claim carefully.

In 2011, the United States Court of Appeals for the District of Columbia issue an SEC rule under the pretext of not fully considering the economic costs of compliance. In spite of That ruling was widely criticized to impose a cost-benefit analysis that is not required by law, The US Supreme Court seems sympathetic with such a request.

Another loophole would stem from the SEC’s approach to Scope 3 emissions.

Both industry and public interest groups are likely to argue that the SEC misinterpreted its statutory mandate – because it covers emission Range 3 or because it believe it is limited corresponds to “matter” emissions. Or challengers might argue that the SEC has failed to adequately analyze policy considerations from a different approach. The extent to which the SEC responds to critical comments will be important when the courts are asked to decide whether the SEC acted arbitrarily or erratically or unlawfully.

In the end, it’s possible the matter was out of the hands of the SEC. Some reviewers have suggested that regulation of climate disclosure is too important a question for regulators and for Congress. Courts sometimes express skepticism towards the actions of agencies that represent so-called “main question“Including people related to climate change.

If the courts consider climate disclosure a key question, they could ignore the rule even if the SEC has strongly supported its approach.

A long way to go

The SEC has taken an important step that could advance the Biden administration’s climate change agenda, but can it navigate a complicated legal and administrative process without changing its approach? or not remains to be seen.

The proposed rule-making notice is often just the opening offer in an ongoing rule-making negotiation.

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Daniel E. WaltersAssistant Professor of Law, Penn State and William M. MansonLaw students, Penn State

This article was republished from Conversation under a Creative Commons license. Read original article.



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