Amanda Lane

Associate Editor

Loyola University Chicago School of Law, JD 2025

The U.S. Environmental Protection Agency (EPA) issued a proposed rule in March of 2022 mandating that publicly-traded companies report their levels of greenhouse gas (GHG) emissions and strategies for reducing climate risk on their Form 10-K, a form used to report annual financial performance. The response from Wall Street was swift and unprecedented, and the Supreme Court decision in West Virginia v. Environmental Protection Agency in June of 2022 further delayed the SEC’s release of the final rule. The delay may soon be drawing to a close; the SEC is expected to issue a final rule significantly paring back the proposed climate disclosures. 

The Proposed Rule

The initial proposed rule made in 2022 would have required climate disclosures of publicly traded companies in three distinct categories. The first category, referred to as Scope 1, would have required companies to disclose the amount of GHG emissions the company produced through its direct sources. Scope 2 disclosures would have required reporting of indirect emissions, like those from purchased electricity or other forms of energy. Scope 3 disclosures would have required reporting of emissions in the individual corporation’s supply chains and users of their products if material or if the corporation had set GHG emissions targets or goals that included Scope 3 emissions. 

The SEC suggested that the proposed rule would provide investors with useful information to assess a company’s exposure to – and management of – climate-related risks, presumably leading to more informed investment-making decisions.

Public Response  

The SEC received over 15,000 comments letters during its public comments period following the release of the proposed rule, the most ever received for a single proposal. The unprecedented response to the proposed rule caused the SEC to postpone the final rule release date, and most recently missed an expected October 2023 release as it reviewed the public comments. 

SEC Chair Gary Gensler argued that Scope 1 and Scope 2 climate-risk disclosures are already reported by a majority of top public companies. With the proposed rule, Chair Gensler argued, the SEC would bring consistency and uniformity to emissions reporting. 

Even Walmart, the world’s largest company by revenue (with $548.743 billion in sales in 2020), issued a comment letter supporting the proposed rule expanding climate-risk and GHG emissions data as “consistent, comparable, and reliable information on climate change and other environmental, social, and governance (ESG) topics.”

Opponents of the proposed rule, such as the House Financial Service Committee’s Oversight and Investigations Subcommittee, challenged the SEC’s legal authority for such a rule in a January 2024 hearing. There, subcommittee Chair Rep. Bill Huizenga (R-MI), cited the Supreme Court’s decision in West Virginia v. Environmental Protection Agency and argued that Congress had not delegated authority to the SEC to require climate disclosures. 

Vice President of domestic policy at the National Association of Manufacturers (NAM) Charles Crain, along with other actors in industry, took aim specifically at Scope 3 disclosures requiring emissions reports from the supply chain. Chair Crain argued that under the Administrative Procedure Act – which governs the process by which federal agencies develop and issue regulations – proposed rules can’t be based on faulty cost-benefit analyses and can’t exceed an agency’s statutory authority. 

West Virginia v. Environmental Protection Agency

In June of 2022, three months after the release of the proposed rule, the Supreme Court dealt a major blow that limited the Environmental Protection Agency’s (EPA) power to regulate carbon emissions that cause climate change. In a 6-3 decision, the Court’s conservative majority held that under the so-called “major decisions doctrine”, neither the EPA nor any other agency may adopt rules that are “transformational” to the economy, unless Congress has specifically authorized such a rule for a particular problem (such as climate change). In the majority opinion, Chief Justice Roberts wrote that any agency must point to “clear congressional authorization” for the regulatory power it claims. The Court’s liberals furiously dissented, and Justice Kagan wrote that the Clean Air Act clearly anticipates that the EPA will need to adapt and address new problems as they arise and uses broad language to allow that. 

Implications

The decision seems to introduce new limits on the breadth of an agency’s regulatory power across the economy in general, and on the proposed SEC rule in particular. Following West Virginia v. EPA, the SEC dropped the entirety of the Scope 3 emissions disclosures regarding supply chains from the proposed rule. The Agency is even expected to curtail Scopes 1 and 2 by easing reporting requirements related to direct emissions and indirect emissions and narrow the disclosures to how material (i.e. important) the information would be to the company’s investors.  The paring-down of the proposed rule, and the decision in West Virginia v. EPA, strike at the very heart of governmental environmentalism, and seems to refute any holistic regulatory attempt to address climate change.