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Republican U.S. Representatives Bill Huizenga (Mi.) and John Rose (Tenn.) of the Oversight and Investigations subcommittee of the Financial Services committee addressed a panel of witnesses during an 18 March 2024 hearing in Lebanon, Tennessee on the Security and Exchange Commission (SEC) and the potential implications of its climate disclosure rules. (Credit: U.S. House of Representatives.)
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A group of GOP lawmakers are resisting a new U.S. Securities and Exchange Commission (SEC) policy that requires the disclosure of specific emissions and climate-impact related data. They contend that the regulatory framework could have unintended repercussions, potentially harming both businesses and consumers.
The regulation was put under the microscope by Republican lawmakers in the U.S. House of Representatives in a hearing convened 18 March 2024 in Lebanon, Tennessee by the Oversight and Investigations Subcommittee of the Financial Services Committee (FSC).
Witness testimony in the hearing underscored the political sensitivity of what has become a polarizing debate over the scope of environmental, social, and governance (ESG) focused policies in U.S. commerce, and many states and companies have sought to challenge the rule through the courts. ESG principles have spread widely throughout Europe and North America and are applied in many corporations and regulatory bodies.
“Proponents of stronger regulation are challenging the rules as not going far enough, while several state attorneys’ general and others are suing to try to block the rules from going into effect,” said Jessica Magee, a Dallas-based attorney at Holland & Knight. “Surely, more challenges will be filed.”
A lawsuit in the Fifth U.S. Circuit Court of Appeals in New Orleans featuring Denver-based Liberty Energy Inc., the states of Texas, Mississippi and Louisiana and the U.S. Chamber of Commerce among the plaintiffs against the SEC was granted an administrative stay 15 March 2024. The pause has temporarily frozen the SEC’s ability to enforce the rules.
Answering Major Questions
The SEC voted 3-2 on 6 March 2024 to approve a new set of rules intended to standardize climate-related disclosures by public companies and in public offerings.
SEC Commissioner Caroline A. Crenshaw, a Democrat, said in her statement that the ruling was “the bare minimum” and that she was “loath to leave for future Commissions those obligations that I see as our responsibilities today.”
In his dissent, Republican SEC Commissioner Mark Uyeda wrote that the SEC "is a securities regulator without statutory authority or expertise to address political and social issues" and that it has "ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change."
The top Democrat serving on FSC, U.S. Rep. Maxine Waters, (D-Ca.) said the SEC taking a first step to implement a climate disclosure framework was welcome but criticized the rule for not going far enough.
“Under this rule, publicly traded insurance companies and banks that are currently feeling the impacts of the climate crisis—and passing that cost along to their customers—would be permitted to continue to stick their heads in the sand about climate risk,” Waters said 7 March 2024.
A group of 77 House Democrats, led by U.S. Rep. Kathy Castor of Florida’s 14th District, urged the SEC to draft a comprehensive climate disclosure ruling on 7 Aug. 2023.
Magee said challengers of the climate disclosure rules will point to the U.S. Supreme Court’s Major Questions Doctrine as the judicial interpretation underpinning their objections to ESG-related climate disclosures as Whitney Hermandorfer, director of strategic litigation in the Tennessee Office of the Attorney General, did in her testimony.
“They’re trying to fit a square peg in a round hole,” said Hermandorfer. “You can’t use such generalized language for this type of industry-altering regime. That’s not how we think of Congress empowering agencies.”
The Fifth Circuit Court of Appeals will assess in Liberty Energy Inc. v. SEC whether the rules “exceed the agency’s authority on a subject matter that presents a ‘major question’ of economic and national importance, and which would therefore require a clearer statement from Congress to provide such authority,” Magee said.
An important precedent to consider, Magee added, is the Supreme Court's 2022 opinion in West Virginia v. Environmental Protection Agency (EPA), which struck down the EPA’s "Clean Power Plan Rule."
The Court, in analyzing the statutory grant under which the EPA claimed authority, concluded that the rule exceeded the EPA's power, as it presented a "major question" of economic and national importance that required a clearer statement from Congress to confer such authority.
During the hearing, U.S. Rep. Andy Barr (R-Ky.) prompted Hermandorfer to address SEC Chairman Gary Gensler’s claim that the agency had broad authority to mandate climate disclosure requirements.
Hermandorfer said the “social issue disclosures” were addressed in a ruling and that the SEC had already determined it did not have the statutory authority to implement such changes.
Unintended Consequences
A likely consequence of removing the Scope 3 requirement from the SEC climate policy is the outsourcing of emissions down their value chain, thus making them harder to measure, said Alex Scott, associate professor of supply chain management at the University of Tennessee during his testimony. The energy sector, as the largest producer of greenhouse gas emissions (GHG), is expected to absorb the biggest impact from the new regulation, he added.
“It would change the calculus of whether they use their own assets or offshore them, because it’s just a matter of accounting,” Scott said. “Large, public companies that can often be influenced by consumers and government policy – will likely be shifted to companies that are not consumer-facing, more likely to be private, and possibly less influenced by government policy.”
Despite any delays that result from legal challenges, companies should begin preparing to comply with the new rules now, using any down time or grace period as a test-run before ramping up for full enforcement, Magee said.
“Even though the rules provide a phase-in period for compliance, companies need to have the right people, policies, practices, and systems in place — which will take time and money,” Magee said. “As litigation and politics play out, companies should consider using the time to make an internal trial-run of their systems, including internal financial and disclosure controls, and practice how they will craft compliant disclosure to test the company’s readiness and make refinements as needed.”
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About the author: Stefan Modrich is a Washington, D.C.-based reporter for 3E. He covers the latest developments in environmental health and safety policy and regulation. Modrich previously wrote for S&P Global Market Intelligence, The Arizona Republic, and the Chicago Tribune. He is an alumnus of Arizona State University and the University of Zagreb.
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