Monday was Earth Day, an annual event celebrated every April 22 meant to demonstrate support for environmental protection.
This year’s event came on the heels of the U.S. Securities and Exchange Commission (SEC) issuing its final climate disclosure rule — and the legal challenges that, so far, have stalled implementation of the long-awaited regulation. Earth Day 2024 also came as a growing number of states have issued their own edicts on climate-related matters.
What is the status of the SEC rule, what is likely to happen next, and what, exactly, is going on in the states?
Let’s take a look, but first …
What Would SEC’s Climate Disclosure Rule Require Of Companies?
The SEC’s final climate disclosure rule, issued in early March, is much less robust than the commission’s proposed rule from nearly two years prior. Still, among other things, it would require a registrant to disclose:
- Material climate-related risks and activities to mitigate or adapt to such risks;
- Information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and
- Information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.
Notably, the final rule scrapped Scope 3 requirements. (These are the emissions generated throughout the company’s supply chain and customers’ use of its products.) The rule also said disclosure of Scope 1 and 2 greenhouse gas emissions was on a phased-in basis by certain larger registrants only “when those emissions are material.”
Unlike the proposed rule, the final rule also did not require all public companies to disclose their direct emissions. Only large and mid-size companies must report their emissions that come from generating the electricity a company uses. They will have to report emissions for fiscal years that start in 2026 and 2028, respectively. The SEC also dropped a provision that would have required companies to report the emissions generated by products they sell, a win for energy companies who opposed the rule.
Those changes were not enough to satisfy opponents of the rule, however.
Legislative, Judicial Challenges To SEC Rule Proliferate
The SEC’s final regulation was supposed to take effect this May, but that will not happen.
As experts from Debevoise and Plimpton, LLP have explained, “a flurry of lawsuits” erupted shortly after the SEC released the final rule. According to DLA Piper, these cases include challenges brought by:
- Nine states and the American Free Enterprise Chamber of Commerce, which sued in the Eighth Circuit of Appeals. The challengers alleged that, in issuing the rule, the SEC overstepped its mandate from Congress.
- The Texas Alliance of Energy Producers and Domestic Energy Producers Alliance and Texas, Louisiana, and Mississippi in the Fifth Circuit Court of Appeals. These entities argued the SEC lacked the authority to issue this rule, that the rule is arbitrary, capricious, and premised on evidence that is mixed, and violates the First Amendment by effectively mandating companies to talk about climate change.
- The attorneys general of West Virginia and Georgia, which also argued the SEC exceeded its statutory authority.
These cases were consolidated into a single case to be heard by the Eighth Circuit.
But these cases weren’t the only ones filed against the SEC on this matter. The Sierra Club also sued the SEC in the District of Columbia Circuit on the grounds that its organization and its members cannot adequately manage their investments in public companies without complete information on their exposure to climate risks. Yes, the Sierra Club wants the SEC to be required to go back to its broader scope proposed rule.
On April 4, 2024, the SEC itself issued an order staying implementation of the regulation because of all of the legal challenges. The SEC was clear in that announcement, however, that it is not abandoning the rule. In fact, the commission pledged to “continue vigorously defending” the regulation’s validity in court. As experts from Debevoise and Plimpton noted, “It is unusual for the SEC to stay its own rule pending judicial review.” One reason the commission may have taken this step is “to avoid procedural litigation…and to facilitate swift substantive consideration of the rule itself.”
Meanwhile, federal lawmakers also are challenging the rule on Capitol Hill. Senate Banking Committee Ranking Member Tim Scott (R-S.C.) has introduced a Congressional Review Act (CRA) resolution to overturn the rule. If signed into law (a highly unlikely outcome given President Joe Biden’s support for the regulation), the resolution would rescind the SEC action and prohibit the agency from issuing a substantively similar rule for the next five years. Every Republican member of the committee supports the resolution. “The SEC’s mission is to regulate our capital markets and ensure all Americans can safely share in their economic success — not to force a partisan climate agenda on American businesses,” Sen. Scott said. “This rule is federal overreach at its worst, and the SEC should stay in its lane.”
Before Sen. Scott introduced his resolution, the House Financial Services Committee (HFSC) held several hearings on the rule. Chairman Patrick McHenry (R-N.C.) argued the rule would have a negative effect on U.S. companies and the broader marketplace. Republican members of the HFSC also have launched a CRA challenge to the rule.
While the courts, regulators and lawmakers in Washington, D.C. hash out these challenges, states are moving forward to implement their own climate policies that would significantly impact the financial services and technology industries.
Climate Battles In The States Also Proliferate
As Prokauer has explained, California last fall became the first state to enact a climate reporting law. Senate Bill 253 requires both public and private U.S. entities that conduct business in California and have total annual revenue exceeding $1 billion to report on their greenhouse gas emissions annually. A second piece of legislation, Senate Bill 26, requires entities that conduct business in the state and earn at least $500 million to report biennially on their climate-related financial risks.
The U.S. Chamber of Commerce, the American Farm Bureau Federation, California Chamber of Commerce, and others have filed a lawsuit in federal district court challenging the law on First Amendment grounds.
Similar legislation has subsequently been introduced in New York and Washington.
In March 2023, Minnesota amended the state’s regulation of consumer loans and financial institutions to require that banks and credit unions with more than $1 billion in assets submit an annual climate risk disclosure survey to the state commissioner of revenue, starting this year. Colorado has a law on the books that requires the state Public Employees’ Retirement Association board to report on a description of climate-related investment risks, impacts, and strategies.
Maryland has enacted a law that requires the State Retirement and Pension System to address climate risk management and to report annually on the level of climate risk across its investment portfolio. The law allows the chief investment officer to invest or divest based on the information in the report. The state also has legislation on the books that would require the appointment of an individual to be responsible for monitoring, evaluating, and quantifying the risks and effects of material environmental factors on the investment of the assets of several state systems.
On the flip side, in Oregon last year a bill to require the state treasurer to make climate risk disclosures to potential investors when marketing securities failed.
Meanwhile states from Florida to Maine and Colorado to Pennsylvania have tried to limit any type of environmental, social, and governance (ESG) reporting, tracking, and decision-making. According to Morrison Foerster, in general, these bills try to:
- Invalidate government contracts with financial institutions that use ESG criteria;
- Prohibit ESG considerations in investment decisions (North Dakota lawmakers have approved a bill to take this step, and so have policymakers in South Carolina);
- Require statements from financial services providers certifying that they do not negatively screen any company based on ESG factors;
- Divest the state from financial institutions or companies that negatively screen using ESG criteria (an Arkansas law touches on this issue);
- Prohibit boycotts based on ESG considerations (Utah is one of the states that has passed a version of this legislation);
- Prohibit investment decisions with the purpose of influencing environmental or social policy (Indiana lawmakers have addressed this issue);
- Prohibit ESG criteria in employment decisions and in insurance rate making;
- Prohibit governmental entities from entering contracts with companies that boycott certain industries, such as fossil fuel, that have poor ESG credentials (Alabama and Idaho have this type of bill on the books); and
- Create civil penalties, including fines, for violating anti-ESG legislation.
Florida Gov. Ron DeSantis (R) has been one of the most outspoken proponents of state legislation to prohibit ESG disclosures and considerations in the financial sector. This past January, he announced Florida will begin enforcing violations of its anti-ESG law, which includes several of the provisions listed above. The governor took financial institutions to task for signing attestations that promise “they are not doing ESG or social credit scores” even though these entities are doing things that would violate the state law. The governor said he has had discussions with members of the state legislature about what actions can be taken against these banks when the legislature reconvenes early next year.
In other words: even if the SEC’s climate disclosure rule suddenly disappears tomorrow, financial services and fintech companies and their customers still will have plenty of ESG-related landmines to traverse.