Amanda Lane
Associate Editor
Loyola University Chicago School of Law, JD 2025
The Securities and Exchange Commission (SEC) released its final Climate Disclosure Rule on March 6, 2024. As discussed in my last article, the proposed Climate Disclosure Rule 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 greenhouse gas (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.
In a 3-2 vote along party lines, the SEC approved a weakened version of Rule that does not require companies to report certain Scope 3 emissions, including from their supply chains and customers’ use of their products (such as coal or crude oil). This move, while attempting to placate Wall Street and environmental groups alike, seems to have accomplished neither.
The Final Rule
Besides the Scope 1 and Scope 2 disclosures present in the proposed rule, the Final Rule largely excludes Scope 3 disclosures, and requires companies to report climate-related risks – such as floods and wildfires – that would have a material impact on a company’s bottom line. Steps taken by a company to mitigate or adapt to climate risks will need to be disclosed, along with any losses incurred as a result of severe weather.
Disclosures comporting with the Final Rule begin in fiscal year 2026, and some smaller companies won’t be required to make climate disclosures at all. The delayed reporting requirement didn’t stop certain stakeholders from taking immediate legal action, however.
Wall Street Response
On the same day the Final Rule was released, oil-field services companies Liberty Energy and Nomad Proppant Services filed a lawsuit in the Fifth Circuit. The lawsuit requested an administrative stay on the climate disclosures, and the plaintiffs argued that the Final Rule “directly or indirectly regulates significant aspects of the country’s economy under the guise of requiring detailed (and wildly speculative) disclosures about ‘climate-related risks’ and ‘greenhouse gas’ emissions.” They also argued that the SEC lacked authority to create a climate rule, and that the Rule itself was arbitrary and capricious and violated the First Amendment. The companies also pointed out that the Rule would expose them to litigation and that the SEC itself as estimated compliance will collectively cost companies more than $4 billion.
The Fifth Circuit has become a preferred venue for legal challenges to Biden Administration policies, considering a significant portion of its judges were appointed by former President Donald Trump. The Court, without providing reasoning, issued a stay to all portions of the Final Rule just over a week after the lawsuit was filed while it considers arguments.
Shortly after the Final Rule was released, a coalition of 10 States Attorneys General, including Georgia, West Virginia, and Alaska, sued the SEC, arguing that the Rule was “illegal and unconstitutional.”
Just last week, the U.S. Chamber of Commerce, which represents a cross-section of American industries, also followed (and filed) suit, seeking to halt implementation of the Final Rule. Executive Vice President of the Chamber’s capital-markets group, Tom Quaadman, stated that the changes would “only create more confusion and undermine investor confidence in our public company system.”
Environmental Response
The Sierra Club, not to be outdone by Big Business, also filed suit last week, this time in the U.S. Court of Appeals for the D.C. Circuit. It alleged the Final Rule doesn’t go far enough to protect investors, and that stripping the Final Rule of its Scope 3 emissions disclosures was arbitrary. The Sierra Club in a statement said that its organization and its members manage millions of dollars in investments, which they cannot adequately manage without full and complete information about downstream climate risks. By failing to preserve more robust disclosure requirements, the SEC fell short of its responsibility under federal law to protect investors, the Sierra Club argued.
A Surprise
But one group seems at least partially satisfied. Small businesses have so far reacted with appreciation that the SEC backed down from certain disclosure requirements. The lack of Scope 3 emissions requirements – quantifying the carbon footprint from supply chains and the use of their products – is a reprieve for small businesses worried they would be roped into their big customers’ compliance and accounting burdens (without the resources that big businesses have to fully capture that information). Executive Director of the National Federation of Independent Business’s Small Business Legal Center, Beth Milito, stated that “Small businesses can breathe a sigh of relief.” The National Association of Manufacturers saw the removal of Scope 3 disclosures as “progress”.
Implications
The lawsuits by Big Oil – the Liberty Energy and Nomad Proppant Services lawsuit – and so-called Big Business – U.S. Chamber of Commerce – shouldn’t be conflated with the reactions of small and mid-sized businesses. President of the National Association of Egg Farmers, Ken Klippen, says “[he] feel[s] better. It’ll take some of the pressure off.” in response to the SEC’s axing of Scope 3 disclosures.
Despite the reaction from massive multi-billion-dollar corporations that have the resources necessary to comply with Scope 3 disclosures, their reaction doesn’t reflect the desire many small and mid-sized businesses have to work with and encourage environmental responsibility.
Chief Executive of Ohio-based food wholesaler Happy Chicken Farms and Merry Milk Maid, Bruce Lackey, sells to gigantic grocery chain Kroger. He stated in a recent New York Times article that he isn’t opposed to all environmental regulation: “Hey, I’m all for clean air and water.”
Despite the point of tension between Big Business and the chicken farm that sells to Big Business down the road, responsible and attainable environmental regulation and accountability is possible, and the SEC, after a multi-year process, has found a medium that can work for now.