SEC climate-related disclosure rules on hold

Once again, it seems, an ESG-related piece of legislation or regulation takes one step forward and two steps back. In an all-too-familiar scenario (take the Corporate Sustainability due Diligence Directive as another example), the US Securities and Exchange Commission (SEC) has put a hold on proposed new climate-related disclosure rules pending judicial review.

The regulations, setting out requirements for companies to disclose climate risks, have been controversial, triggering lawsuits before they even come into force. Last month, business lobby group the US Chamber of Commerce filed a lawsuit against the SEC over the climate disclosure rules. It said the rules are “flawed”, with “substantively harmful changes to 50 years of corporate governance”.

Legal actions have also come from environmental groups on the other side of the debate, arguing that the rules have been pared back too far after requirements to disclose Scope 3 emissions through supply chains were dropped.

The SEC now says that while it “vigorously defends” the legislation, the final rules will be put before the 8th US Circuit Court of Appeals. This will allow “the orderly judicial resolution” of challenges to the rules and “allow the court of appeals to focus on deciding the merits”.

So the SEC is caught between states, energy companies, and the US Chamber of Commerce on one side, and environmental groups on the other. And, one observer noted, it all goes to show, in a presidential election year, just how politicised and polarised the arguments become on climate and sustainability more broadly.

In a briefing, Hogan Lovells points out that the parties challenging the rules include 23 states or state entities, energy companies, the US Chamber of Commerce, and other trade associations, as well as the Natural Resources Defense Council and the Sierra Club. It notes that a spokesperson for the SEC stated that the agency will vigorously defend the rules in court.

“Among other matters, we expect challengers to assert that the rules are an invalid overuse of statutory authority pursuant to the ‘major questions’ doctrine that has recently gained support at the US Supreme Court,” says Hogan Lovells. “It is too soon to predict the outcome or timing of the legal challenges. Whether or not the SEC rules survive judicial scrutiny in the long run, the ongoing global regulatory shift toward requiring more climate-related disclosures by public companies, driven by investor and stakeholder demand, seems likely to continue.”

The SEC’s final climate disclosure rule was released, after nearly two years of deliberation. Public companies that are registered with the SEC will have to disclose material climate-related risks and information about risk mitigation in their registration statements and annual reports. These companies must also disclose any climate-related targets or goals that are material to the business, operations results, or financial condition. Larger filers will have to disclose how material Scopes 1 and/or 2 greenhouse gas emissions (GHG) affect their business. As expected, Scope 3 emissions, which include upstream and downstream emissions not directly tied to company operations, were not included in the final rule.

Diya Sawhny, managing director-strategy, Moody’s, said at the time of the release of the rules: “The US Securities Exchange Commission’s climate disclosure rule marks a significant milestone in climate reporting for investors if implemented, and while much of the dialogue about the new rule has centred on GHG emissions, disclosures related to the potential impacts of physical climate risks are also included. Such risks can have financially significant effects – for example, climate events are resulting in increasing damage and loss amounts each year, according to Moody’s analysis, stressing insurers’ capacity to manage their approximately $133trn in insured exposure to the US real estate market, and underscoring the need for attention to the escalating physical risks of climate.”

John Scott, head of sustainability risk at the Zurich Insurance Group, said the rules include a greater emphasis on material information – for example, disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price. At the same time, registrants will not be required to disclose any impacts to revenues, costs savings, or cost reductions, and will not be required to apply the 1% disclosure threshold on a line-by-line basis.

And they will have more time to develop certain disclosures. For example, GHG emissions reporting will begin for the largest filers for fiscal year starting 2026, and for midsize filers starting in FY2028. Assurance requirements also build over time (limited first, reasonable later).