Key Takeaways:

  • The U.S. Securities and Exchange Commission (SEC) on Fridayproposed a ruleto formally rescind the climate risk disclosure rule pushed through by former Chair Gary Gensler in 2024. Although adopted in 2024, the rule never took effect.
  • According toFriday's press release, the proposal seeks to rescind the climate disclosure rule "in its entirety." The SEC stated that these rules exceeded its statutory authority, but also noted that even if it had the authority to adopt such final rules, there are "independent and compelling reasons" to rescind them.
  • The 2024 ruleoriginally required companies to disclose climate-related risks and other climate information that had a material impact on them. Earlier this month, the SEC filed documents with the Office of Information and Regulatory Affairs and the federal appeals court handling related litigation,signaling its intent to rescind。

Deep Dive:

The SEC's proposalstates that the 2024 climate disclosure rule was "a serious overreach of the Commission's statutory authority and, independently, unsound as a matter of policy."

The rescission proposal states: "Based on an incorrect understanding of the scope of its authority, the Commission determined that it should adopt dozens of pages of highly specific disclosure rules addressing only climate-related matters, and apply most of those rules to nearly all public companies, regardless of their size, industry, or specific circumstances."

In the rescission proposal, the SEC also argued that even if it had the authority to promulgate these rules, they were "inconsistent" with a disclosure approach "based on registrant-specific circumstances and oriented toward materiality." The SEC also stated that the rules would impose unreasonable "enormous costs," be "contrary" to the agency's objectives, and "far exceed the policy concerns of federal securities laws."

The SEC first proposed the climate risk disclosure rule in 2022 and, nearly two years later, voted 3-2 toadopt it. After adoption, the rule facedmultiple lawsuits, with the challenges consolidated in the Eighth Circuit Court of Appeals, and the SEC stayed implementation of the rule during the litigation.

After initially proposing to require all public companies to disclose Scope 1, Scope 2, and Scope 3 emissions, the final rule only required a more limited set of public filers to report Scope 1 and Scope 2 emissions.

After President Donald Trump took office, the SEC first sought to withdraw its defense of the rule in court, but the federal judge overseeing the case said in September that "determining whether to rescind, revoke, amend, or continue to maintain the final rule is the agency's responsibility." An SEC spokesperson told ESG Dive earlier this month that agency staff were drafting a rescission proposal at the direction of SEC Chair Paul Atkins.

Atkins said in Friday's press release: "The SEC's disclosure obligations should align with the Commission's statutory authority, use materiality as the North Star, avoid having the practical effect of directing corporate behavior, and be imposed only when the expected benefits justify the potential costs and burdens."

The SEC's rescission proposal states that the costs imposed on companies by the 2024 rule "are not justified by the informational benefits it provides to some investors." However, the nonprofit organization Better Markets, inFriday's press releasea statement, said that companies' climate-related risks "are critical to their profitability, and investors have the right to understand these risks and weigh their materiality themselves."

Benjamin Schiffrin, the nonprofit's director of securities policy, said in a press release: "This action threatens to leave investors in the dark. The risks faced by public companies are critical to investors, and the SEC's proposal fails to acknowledge that climate-related risks are no exception."

SEC Commissioner Hester Peirce, inFriday's statement, said she understands "why some people strongly support" the agency's climate disclosure rule. She said, "Many people view climate change as an existential threat, and therefore believe any tool is justified," including corporate disclosure frameworks.

Peirce said: "However, designing securities disclosure as a lever for change exceeds the authority Congress granted to the SEC. Adhering to a neutral, materiality-focused disclosure framework not only aligns with the SEC's statutory authority but also benefits the health of our capital markets."

Although the SEC has proposed rescinding its disclosure rule,climate disclosure regulations in California and an increasing number of global jurisdictions remain in effect。