SEC, Courts Continue Back-and-Forth on Climate Disclosure Rules

With summer temperatures soaring across the country, a game of hot potato sounds about as enticing as sitting down at a shadeless park bench for a bowl of chicken noodle soup. Apparently not to the federal courts and the Securities and Exchange Commission, however.

The SEC asked a federal appellate court last week to rule on the validity of climate-risk reporting rules developed during the previous administration. The climate disclosure rules came as the result of a years-long slog undertaken by Democratic lawmakers to require companies to include in public filings both the environmental impact of their own operations and the risks climate change poses to their businesses. The new regulations drew heavy fire from business-aligned legislators and business interests at every turn of the rulemaking process.

The finalized rules prompted legal challenges from several states and industry groups, prompting the Biden administration to put their implementation on hold. After Republican President Donald J. Trump began a second term in office in January, the SEC indicated it would not defend against legal challenges to the rules.

This maneuver initiated a standoff with the St. Louis-based United States Court of Appeals for the Eighth Circuit. In April, the Eighth Circuit directed the SEC to declare if the agency planned to “review or reconsider the rules at issue in this case.” Additionally, the appellate court asked the SEC to reveal if it intended to abide by the climate disclosure rules if the court denied the requests to review the rules. The Eighth Circuit’s order came in response to a submission by Democratic states, such as California, in defense of the climate rules.

In a memo on the Eighth Circuit’s order, law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. concluded the court was refusing “to let the climate disclosure rule die quietly in the dark.” The SEC’s decision not to defend the new regulations would not suffice on its own, in other words: Regulators would have to undergo the official administrative process to quash them.

This response did not align with the administration’s preferred approach. For the sake of “an efficient resolution to the dispute,” the SEC asked the court in last week’s filing to issue a decision, which “would inform the scope and need for such action, including providing insights as to the Commission’s jurisdiction and authority.”

The SEC’s latest move drew pointed criticism from commissioner Caroline Crenshaw, a supporter of the climate-risk disclosure rules. Noting that the rules “were promulgated by-the-book,” she accused the agency of making a bad-faith argument about conserving resources in lieu of initiating the formal process to revise or repeal the rules.

So why is the climate-risk hot potato back in the hands of the Eighth Circuit? It’s likely more than a matter of the SEC not wanting to make the effort to undo the rules. Ironically, it seems the SEC wants the court to determine that this kind of rulemaking exceeds the agency’s authority, which could limit the scope of future climate-related rulemaking. For its part, the court’s previous decisions on the matter suggest it wants the SEC to go through official channels; otherwise, this game never would have started.

Meanwhile, at the rate California is going, it might not make a difference which side gets caught holding the steaming spud. The largest state in the union constitutes one of the world’s biggest economies by itself, and the state government is pressing ahead with plans to put climate reporting rules in place for companies next year. Under the California law, companies that do business in the state and have annual revenues of more than $1 billion will be required to report a broad range of emissions data. Additionally, companies doing business in California with annual revenues of more than $500 million will need to prepare annual reports on their climate-related risks and their plans to address those risks.

The European Union will have its own set of climate disclosure rules for companies soon, too. Although the EU has delayed implementation of new sustainability regulations, they are still coming for U.S. corporations doing business across the pond.

So, ultimately, the ongoing game of hot potato taking place between the SEC and federal courts over the climate disclosure may amount to nothing more than that–a game.