Editor's Note:This article reviews insights shared during an online panel discussion last week by sustainability and compliance experts from Morningstar, Ceres, and Morgan, Lewis & Bockius LLP on the current global climate regulatory landscape. You canregister here to watch the replay, including the full event "Risk and Reward: Complying with SEC Climate Rules."

The SEC Climate Rule: A Two-Year Journey from Proposal to Stay

The U.S. Securities and Exchange Commission's (SEC)climate risk disclosure rulehas experienced a rather turbulent journey over the past two years. First proposed in 2022, the rule would have required companies to describe their greenhouse gas emissions levels and strategies for reducing climate risk in their Form 10-K filings—an announcement that was immediately met with opposition from corporate and political figures, particularly Republicans at the state and federal levels.

After delaying the initial release and reviewing more than 24,000 public comments, the SEC voted 3-2 in early March of this year topass the long-awaited final rule. The final version completely removed the Scope 3 emissions disclosure requirement and scaled back reporting obligations for Scope 1 and Scope 2.

Although the final rule was significantly watered down from the original proposal, theregulation still faced legal challenges almost immediately—critics argued the SEC had overreached, while supporters said it did not go far enough. As a result, the SEC announced in April that it would stay the rule while it addressed these lawsuits.

The Global Regulatory Landscape: More Than Just the SEC

Although the rule is currently stayed, it is just one of many climate regulations that U.S. companies may need to comply with in the future. This includes both domestic disclosure requirements, such asCalifornia's two climate bills(Senate Bills 253 and 261), and overseas frameworks, such as the European Union'sCorporate Sustainability Reporting Directive (CSRD)。

Last week, ESG Dive, along with its sister publication CFO Dive, hosted a virtual event focused on how industry leaders and C-suite executives can chart a smart compliance path for their companies in the context of the SEC climate rule and other disclosure regulations. Experts from Ceres, Morningstar, and Morgan Lewis shared insights on the recent convergence of global reporting frameworks, the Supreme Court's ruling on the Chevron doctrine, and the impact of the numerous legal challenges facing the SEC rule on the future of climate disclosure requirements.

Here are the key takeaways from our "Risk and Reward: Complying with SEC Climate Rules" event held last Thursday.

Regulators' Enthusiasm for Climate Disclosure Has Waned

After the SEC abandoned its initial rule requiring all public companies to disclose full scope emissions, Lindsey Stewart, Director of Stewardship and Policy Research at Morningstar Sustainalytics, said the final rule shows a growing gap between what investors expect in terms of disclosure and what regulators actually deliver.

"The rule we ended up with is very different from what was proposed in 2022," Stewart said. "I think a lot of the high ambitions we saw at COP26... where investors and companies were expected to lead the way towards net zero and climate action, that initial enthusiasm seems to have waned in the intervening time when it comes to climate risk reporting and disclosure."

Stewart noted that the comment letters the SEC received showed that, in addition to basic expectations for greenhouse gas emissions and material climate risk and opportunity disclosure, investors also wanted companies to have "an appropriate level of climate competence" on their boards and throughout management.

How Companies Can Best Prepare for Disclosure Requirements

"You need to start preparing now," said Erin Martin, a partner at Morgan Lewis. She advises public companies and their boards on securities regulation, capital markets transactions, and corporate governance. However, Martin also noted that these preparations will be affected by the "significant uncertainty" surrounding the disclosure requirements.

"Navigating the changing and evolving regulatory landscape is going to be a challenge for any public company," she said.

Martin said companies need to consider questions such as where to focus their time and resources, and what constitutes "financial materiality" to meet the growing disclosure requirements. She noted that while determining financial materiality can be time-consuming and labor-intensive, she has advised clients "not to wait for the courts to decide," referring to the numerous legal challenges facing the SEC rule.

Martin mentioned that although the SEC'slegal battlescould take up to 18 months to resolve, ultimately some parts of its disclosure rule—if not all—"will still be required to be implemented."

"To ensure you can provide accurate information that meets SEC requirements and rules... you need to establish processes today to anticipate these rules, so that you can ensure you provide accurate disclosures to stakeholders under federal securities laws," Martin said. "We can't just sit and wait."

Comparing the SEC Rule to Other Climate Disclosure Regulations

There has been much discussion about how the SEC's final rule compares to other disclosure requirements, such as California's climate bills and Europe's CSRD—the latter of which still requires Scope 3 emissions disclosure. Jake Rascoff, Director of Climate Finance Regulation at the sustainability nonprofit Ceres, said the importance of having a federal regulation that mandates climate information disclosure in financial reports cannot be overstated.

"For those who say 'Why do we need an SEC rule when we have California, Europe, and the ISSB?' I don't think anything truly replaces having this information included in SEC filings," Rascoff said during the panel discussion.

He said investors look to a company's 10-K or S-1 filings when conducting due diligence or investment stewardship—these documents provide information about a company's activities and financial performance. Rascoff said such SEC-mandated filings are "critical for improving the consistency and comparability of climate risk disclosures."

Rascoff noted that SEC filings are subject to "a level of rigor and scrutiny that voluntary disclosures or even requirements in other... jurisdictions do not have."

"The whole point of disclosure is to provide investors with the information they need to make informed investment decisions, and then through disclosure empower investors to make those judgments," Martin said regarding the SEC's authority to mandate climate disclosure.

Compliance Challenges

Experts who participated in the July 11 panel discussion said compliance challenges will vary depending on how individuals or groups interact with the rules. For investors, Stewart said, among the "many challenges" is navigating the various frameworks that already exist, including those in California and the EU. Companies navigating a fragmented environment will also find it harder to concisely tell the story of how their sustainability mission aligns with their financial narrative.

"It's certainly not going to be easy for companies to effectively communicate [their sustainability and financial story] in a fragmented environment," Stewart said. "So let's hope this fragmentation doesn't last forever. I think every jurisdiction has to start somewhere. We are where we are, so let's move forward from here."

Martin, who spent more than 13 years in the SEC's Division of Corporation Finance, said the rule will also place greater pressure on SEC staff to determine compliance. She said the agency needs to ensure it has appropriate training and the right personnel composition to determine whether company filings are substantively compliant.

What the Chevron Ruling Means for ESG

The U.S. Supreme Court's ruling inLoper Bright Enterprises v. Raimondooverturned the Chevron doctrine, threatening to upend administrative law procedures to varying degrees. In the post-deference era, the fate of regulations may depend more on case-by-case analysis. The doctrine had been used to dismiss a challenge to a Department of Labor rule allowing retirement fund managers to consider ESG factors, a case currently before an appellate court.

Rascoff said the SEC rule's challenge in the U.S. Court of Appeals for the Eighth Circuit has become more difficult due to theLoper Brightruling. He said the agency faces "an uphill battle" in defending its rule.

"The consensus view is that this rule is unlikely to survive litigation completely unscathed," Rascoff said. "I hope some elements of it will survive."

Martin said that while the Chevron doctrine gave agencies leeway to interpret ambiguous statutes, the SEC has been granted broad discretion under the Securities Act of 1933 to implement disclosures it deems "necessary for investors." Therefore, she does not believe theLoper Brightruling will lead to any rule being immediately overturned. However, the ruling will provide opponents with another avenue to challenge the agency's rulemaking process.

Regarding the SEC's current litigation, Martin said the lack of Chevron deference could add more support to the argument that the climate risk disclosure rule is "arbitrary and capricious," but that does not mean the rule will be completely overturned.

"It's not 'we have to start from scratch.' That's not the point," Martin said. "To be clear, the [Loper Brightruling] does have significant implications. It just may not manifest in this very specific technical area."