SEC signs off on landmark climate rule as legal backlash looms

Wall Street’s top regulator green-lighted a groundbreaking rule aimed at uncovering new climate-related information from corporate America, capping a pressure campaign that has fractured Washington for two years.

The Securities and Exchange Commission voted along party lines Wednesday to order thousands of public companies to begin divulging more details about the climate risks they face, the costs of severe weather events and, in some cases, their greenhouse gas emissions. The nearly 900-page rule represents one of the biggest overhauls of U.S. corporate reporting in years and is a legacy-defining effort for SEC Chair Gary Gensler.

Yet the lobbying campaign and threats of litigation against the measure resulted in a scaled-back final rule that lacks many of the sweeping disclosure requirements that were in the original proposal of March 2022 and rankled the business world. The rule will not offer investors as deep a look into companies' carbon footprints as planned — including the most controversial proposal covering their vast supply chains — a priority for many of President Joe Biden's climate allies.

Despite the rollbacks, the SEC is still facing legal and legislative challenges over the rule. Nine Republican-led states, including West Virginia, unveiled plans to challenge the rule in court just hours after its approval. The U.S. Chamber of Commerce is also considering litigation, and Republicans in Congress are vowing to try to overturn it. The changes in the rule could also fan friction on the left for Gensler’s SEC, with many backers already expressing dismay.

“Even after today, the SEC will have a long runway ahead on climate disclosure,” said Satyam Khanna, a former climate adviser at the SEC, before the vote. “Market participants may seek additional guidance. And there’s some risk that, in its effort to allay industry concerns, the SEC adopts arguments exposing it to litigation from advocates.”

The SEC’s rule was approved with support from Gensler and Commissioners Caroline Crenshaw and Jaime Lizárraga, all Democrats. Republicans Hester Peirce and Mark Uyeda voted against it, with both questioning the SEC’s authority to pursue the rule.

Gensler argued that the rule is a natural evolution in the SEC’s push for more disclosure following a decades-long effort from investors to glean more information about companies’ climate-related risks.

“Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information,” Gensler said. “It’s in this context that we have a role to play with regard to climate-related disclosures.”

While voting in favor of the rule, Crenshaw, who has been broadly viewed as the original proposal’s strongest supporter on the five-person commission, argued that it could have gone much further. She called its requirements “the bare minimum.”

“Ultimately today’s rule is better for investors than no rule at all, and that is why it has my vote,” Crenshaw said. But “it does not have my unencumbered support. And, although I am loath to leave for future commissions those obligations that I see as our responsibilities today, I’m afraid that is precisely what we are doing.”

Still, even the pared-down rule stands to give investors a better understanding of corporate climate risk and companies’ environmental impact than ever before — a longtime goal for activists, progressive lawmakers and some financial heavyweights.

It will require public companies in the U.S. to make a raft of new disclosures about climate-related risks that are large enough to threaten their businesses and how they are managing and adapting to them.

Many companies already voluntarily disclose climate-related information. But it's not uniform and investors can often be left mystified reading companies’ reports, which can be difficult to decipher and compare against one another.

Since the plan’s introduction, Washington’s biggest business groups as well as conservative state attorneys general have aggressively hit back at the SEC with threats of litigation over what they say is a regulatory power grab riddled with technical issues.

West Virginia Attorney General Patrick Morrisey, who is involved in the state lawsuit, called the rule "wildly in defect, and illegal and unconstitutional."

The states wrote in their petition to the Atlanta-based 11th U.S. Circuit Court of Appeals that they “will show that the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law."

An SEC spokesperson, asked about the lawsuit, said the agency follows its authorities and proper procedures when finalizing rules and will "vigorously defend" its climate reporting rule in court.

The warnings have taken on new weight as conservative judges across the country including at the Supreme Court signal growing interest in reining in federal regulators — a reality the agency is reckoning with on multiple other fronts.

The SEC responded to the lobbying blitz by reducing both the rule's breadth of requirements and reach across the universe of public companies.

The agency most notably dropped its so-called Scope 3 disclosures, which would have required certain large companies to provide data about the emissions generated by their suppliers and customers. Opponents of the mandate argued that the provision was unworkable and risked roping in private companies that supply publicly traded ones, such as farmers who sell their crops to agriculture giants.

Agency officials told reporters that both companies and some investors had complained about the cost of complying with Scope 3 requirements as well as the data’s reliability.

Companies will also have more leeway to disclose information about the emissions generated by their operations and energy use, known as Scopes 1 and 2 emissions. The final rule mandates those disclosures only if they are significant enough, or material, to the reasonable investor, according to the agency.

Smaller companies would generally not have to comply with the greenhouse gas emissions disclosure requirements.

Among the final rule’s other features are reporting mandates regarding material climate-related risks, companies’ transition plans and the costs, expenses and losses from wildfires, hurricanes and other severe weather events.

The rule will be phased in over the next decade with certain parts set to take effect for large companies in 2025.

Gensler has signaled over the last year that changes were coming to the final rule, emphasizing the need for its survival in the courts.

Indeed, the Chamber of Commerce has retained Eugene Scalia — the former U.S. Labor secretary and prominent administrative law litigator — over the rule. In a statement, Tom Quaadman, executive vice president for the Chamber's Center for Capital Markets Competitiveness, said the group is reviewing the rule's details and will litigate if necessary.

But backers of the SEC’s plan are incensed about the revisions after months of lobbying Gensler to stand by the original proposal. On Capitol Hill, Sen. Elizabeth Warren (D-Mass.) and Rep. Maxine Waters (D-Calif.) have argued that Scope 3 reporting is necessary to fully understand a company’s carbon footprint and the risks that lie with it.

"I am deeply disappointed by Chair Gensler’s decision to significantly weaken the rule in response to an onslaught of corporate lobbying," Warren said in a statement. "The SEC must now do everything in its power to ensure the rule’s robust implementation so that the rule can make a meaningful difference for investors."

The Sierra Club and Earthjustice said they were considering challenging the SEC's final rule for its "arbitrary removal of key provisions" from the proposal.

Executives, in the meantime, are going to have to figure out if and how they should comply with the SEC’s mandate.

“You can’t plan for your organization based on litigation,” said Brad Caswell, head of the U.S. financial regulation group at Linklaters. “It’s going to be a mammoth undertaking for corporates and financial institutions to comply with this rule.”

Lesley Clark, Jordan Wolman and Avery Ellfeldt contributed to this report.