The Securities and Exchange Commission adopted climate disclosure rules in March of 2024 by a three-to-two vote, following two years of rulemaking and more than 20,000 public comments. Public companies would have been required to report greenhouse gas emissions, describe climate-related business risks on a forward-looking basis, and detail whatever steps they were taking to mitigate those risks.

The rules never took effect. Legal challenges arrived almost immediately. The SEC never implemented the rules and on June 3 the Commission published a proposal to rescind the framework in its entirety. 

The SEC’s stated reasoning covers both authority and policy. The proposal says the rules exceed the scope of the agency’s statutory authority, and adds that even if the authority existed, the rules impose substantial costs on public companies and their shareholders that are not justified by the informational benefits, stray well beyond the policy concerns of the federal securities laws, and conflict with the Commission’s objectives around capital formation.

For the organizations that brought the challenge, a withdrawal on policy grounds is not sufficient.

The New Civil Liberties Alliance represents the National Center for Public Policy Research in National Center for Public Policy Research v. SEC, a case that prompted the Commission to revisit the rules. Both organizations filed comments urging the SEC to rescind and to acknowledge that it lacked statutory authority from the beginning.

“The SEC was given broad authority to regulate the stock market but it was never authorized to be an environmental regulator,” said Alana Black, Senior Litigation Counsel at NCLA. “We have another authority for that, the EPA.”

The statutory argument turns on language written in response to the Crash of 1929. The securities laws authorize the SEC to require disclosure of business and financial information necessary or appropriate in the public interest or for the protection of investors. NCLA’s position is that climate information falls outside that grant, and that reading it otherwise stretches the statute past what Congress wrote.

Two recent developments strengthen that argument considerably. The Supreme Court’s Major Questions Doctrine holds that agencies need clear congressional authorization before taking actions of major economic and political significance, and climate disclosure requirements for every public company in the country would seem to qualify. Congress has considered climate disclosure legislation repeatedly and never passed it. Separately, NCLA’s win in Relentless, Inc. v. Department of Commerce ended Chevron deference, which means courts may no longer defer to an agency’s own interpretation of an ambiguous statute. An expansive reading of the Securities Act would have to persuade a judge on its merits.

Black said the organization deliberately narrowed its focus to the authority question rather than arguing the merits of the policy.

“There are certainly good policy arguments against this rule but we wanted to focus on the authority,” she said. “It is a huge burden to make these companies comply, so we need to know that the SEC is allowed to force companies to do things like this.”

A rescission grounded in policy can be reversed by a future Commission with different policy preferences. A rescission that concedes the agency never had authority is considerably harder to undo, because the next Commission would have to explain what changed about the statute.

That durability question is the reason the comments emphasize it, and Black expects the political window to close quickly.

“I would be shocked if we don’t get a rule change before the next presidential election,” she said.

NCLA’s broader project is constraining administrative agencies rather than opposing any particular regulation. The organization previously led the successful challenge to the SEC’s Nasdaq board diversity rules, and it argues the climate rules share the same defect.

“We want the SEC to not only revoke the rules but to do it in a way that acknowledges that the rules were outside the authority in the beginning,” Black said.

The opposing position, advanced by institutional investors, state pension funds, and sustainability-focused asset managers, is that climate exposure is financial information and that existing materiality standards have not produced consistent or comparable reporting. Supporters of the 2024 rules argued that investors managing long-duration portfolios need standardized emissions and physical risk data to price assets, and that voluntary frameworks have produced disclosure too varied to compare across companies. Several SEC commissioners made versions of that argument when the rules passed.

If the rules are dropped, publicly traded REITs would lose a federal reporting obligation that never actually took effect, but the other sources of disclosure pressure remain. California’s climate disclosure laws apply to companies doing business in the state above certain revenue thresholds regardless of what the SEC does. The EU’s sustainability reporting directive reaches companies with European operations. Lenders increasingly ask for emissions and physical risk data as part of underwriting, and large institutional investors have their own reporting requirements that flow through to the assets they hold.

Local building performance standards operate on an entirely separate track. New York’s Local Law 97 and comparable ordinances in Boston, Denver, Seattle, and a growing list of other cities impose emissions caps on buildings directly, with penalties that do not depend on any federal framework.

What the SEC proceeding will settle is whether the federal securities regulator can require this category of disclosure at all. The answer shapes what any future Commission can attempt, which is why both sides are treating a rule that never took effect as worth the fight.

The post The Legal Challenge That Forced the SEC to Reconsider Its Climate Rules appeared first on Propmodo.

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