Key points:

  • The U.S. Securities and Exchange Commission (SEC) issued a press release Thursday afternoon announcing it had voted to stop defending its climate risk disclosure rule in court.
  • Following Acting Chairman Mark Uyeda's request last month that the court delay related litigation arguments, the SEC sent a letter to the Eighth Circuit Court of Appeals (which is handling the consolidated challenges to the rule) on March 27, stating it would withdraw its defense of the rule. The SEC said its attorneys are "no longer authorized" to advance the arguments made during the previous administration to defend the rule.
  • Although this decision was praised by three Republicans on the House Financial Services Committee, sustainable investment experts called the move dangerous. One SEC commissioner said the current commission is seeking to "illegally" dismantle the climate disclosure rule.

Deep dive:

This move further highlights the agency's divergence from the regulatory path of the Biden administration, but the market was not surprised by it. Previously, experts told ESG Dive that after Acting Chairman Mark Uyeda asked the Eighth Circuit last month to postpone arguments, the SEC appeared unlikely to continue defending the rule.

In a February 11 statement, Uyeda said he "continues to question the Commission's statutory authority to adopt the rule, the necessity of the rule, and the assessment of costs and benefits."

Historically, the SEC approved the climate risk disclosure rule in March of last year, nearly two years after it was first proposed, and with significant revisions. The final rule removed the proposal requiring public companies to disclose Scope 3 emissions and required a more limited set of companies to disclose Scope 1 and Scope 2 emissions. After facing litigation challenges, the agency announced in April that it would stay implementation of the rule.

At the time the rule was adopted and in the weeks that followed, Uyeda questioned the agency's authority to craft the rule and said it required disclosure of information that is not financially material to investors.

Under former Chairman Gary Gensler, the SEC filed a 25,000-word brief in August defending the rule against allegations that it was arbitrary and capricious, exceeded statutory authority, was unconstitutional, and violated the First Amendment.

The agency's acting chairman said Thursday's action shows the SEC is seeking to end its "participation in the defense of costly and unnecessarily intrusive climate change disclosure rules."

The SEC's decision to abandon its defense was welcomed by three Republicans on the House Financial Services Committee: Chairman French Hill of Arkansas, Ann Wagner of Missouri, chair of the capital markets subcommittee, and Bill Huizenga of Michigan, vice chairman of the committee. In a Thursday afternoon press release, the lawmakers called the decision a "turning point" and said it was "a welcome and long-overdue acknowledgment... that the rule far exceeded the SEC's statutory authority."

"Under former Chairman Gensler's leadership, the Commission pursued an aggressive climate agenda, twisting the law and imposing enormous costs on public companies and investors," the Republican lawmakers said. "This reversal is a victory for common sense, American businesses, and the rule of law."

However, Democratic SEC Commissioner Caroline Crenshaw said the agency is attempting to "dismantle" the climate risk disclosure rule "through political means," calling it an attempt to "illegally" circumvent the Administrative Procedure Act (APA), which governs how agencies create, amend, and repeal regulations. She made these remarks in a statement following the vote.

Crenshaw said the agency's action "is inconsistent with the APA, historical practice, and reflects poor governance." She argued that the agency should either continue defending the existing rule under litigation or ask the court to pause the proceedings while preparing a rule "it is prepared to defend," moving forward through an APA-compliant repeal or other action.

"Based on (the Commission's) letter, we are apparently leaving the Climate-Related Disclosure Rule in place but withdrawing our defense in court," Crenshaw said. "This leaves other parties, including the court, in a strange and potentially untenable position. In effect, a majority of the Commission is standing on the sidelines, crossing their fingers and hoping the rule fails. The court should not be misled."

Crenshaw said the agency's arguments in support of the rule in litigation remain valid because there has been no change in statutory authority, no new judicial precedent, and no "change in the needs of the investing public."

Several experts believe the SEC's shift in position will harm the investment community and marks a retreat from the agency's mission to protect investors. Steven Rothstein, managing director of the Sustainable Capital Markets Accelerator at Ceres, an environmental nonprofit, said the move is "clearly a step backward in helping investors and other market participants access necessary information about companies' climate-related financial risks."

"The SEC was created to protect investors, and for more than two decades, investors have clearly and overwhelmingly indicated that they need more clear, consistent, and decision-useful information about companies' climate-related financial exposures," Rothstein said in a press release.

Dennis Kelleher, president and CEO of Better Markets, a nonpartisan financial advocacy nonprofit, said that without the SEC's climate risk disclosure rule, capital markets would be unable to make fully informed decisions due to incomplete information, and would be unable to correctly price company stocks and allocate capital.

"When the total amount of information is incomplete, investors cannot make fully informed decisions, stocks will be mispriced, and capital will be misallocated," Kelleher said in emailed comments Thursday. "This is the risk when the SEC fails to put investors first and instead lets management and corporate America decide what information investors can access—and that is exactly what happened today."

In conveying its decision to withdraw its defense, the SEC said it had yielded its oral argument time to the court or other parties the court may designate. Previously, Stephen O'Day, a partner at Smith Gambrell & Russell LLP, told ESG Dive that 18 states and the District of Columbia had signed on as intervenors in the case and might decide to continue defending the rule in the SEC's absence.

The SEC's decision to stop defending the climate disclosure rule came on the same day as the Senate Banking Committee held a hearing on the nomination of former Commissioner Paul Atkins—President Donald Trump's pick to succeed Gensler as SEC chairman.