SEC Halts Defense Of Climate Disclosure Rules

The U.S. Securities and Exchange Commission (SEC) made a dramatic turn-around by saying that it would not defend its climate disclosure rules in court, amounting to essentially stopping enforcement. The move attracted fierce rebukes from investor groups overseeing trillions of assets who say transparency for climate risks in financial markets is crucial.

The climate disclosure rules, originally adopted in March 2024 under former SEC Chair Gary Gensler, required companies to disclose climate risks and greenhouse gas emissions. These regulations were introduced to provide investors with clearer insights into how climate-related risks could impact businesses financially. However, they faced strong opposition from several states and industry groups, leading to multiple legal challenges.

Acting SEC Chairman Mark T. Uyeda rationalized the move to cease defending the rules, terming them "costly and unnecessarily intrusive." According to him, the Commission's action was to put an end to its participation in the legal fight over the regulations. "The purpose of today's Commission action and notice to the court is to end the Commission's participation in the defense of the costly and unnecessarily intrusive climate change disclosure rules," Uyeda said.

With the SEC receding, the courts are now set to determine the destiny of the rules. By pulling back its legal defense, the Commission is essentially leaving the courts to terminate the rules without a technical rescission, a step that has attracted universal condemnation from investors and climate activists.

SEC Commissioner Caroline Crenshaw was one of the most outspoken critics of the move. She contended that the Commission was shying away from taking responsibility for regulations that are so much in favor of investors. "The Commission is trying to make someone else do their dirty work. The strong demand on the part of the investing public for the climate reporting rule hasn't changed," she stated.

Investor groups representing over $50 trillion in assets under management have also widely criticized the SEC's backtracking. They underscore that climate-related financial risks are a central consideration in investment decision-making and that firms need to be required to report them. Steven M. Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets, called the action a huge setback. “Investors have clearly indicated they require better disclosure, with $50 trillion in assets under management broadly supportive of the rule adopted in March 2024. This is clearly a step backward in helping investors and other market participants have the information they need to manage climate-related financial risks,” he said.

The controversy surrounding these rules is not new. When the SEC unveiled the climate disclosure rules a year ago, it claimed that they were needed to enable investors to gauge financial risks tied to climate change. The firms would have been obliged to disclose their greenhouse gas emissions and how they were mitigating climate-linked financial issues. While most companies endorsed the move, others, especially those in the fossil fuel and manufacturing industries, opposed it vehemently, citing regulatory costs and compliance.

Critics of the rule, such as some state attorneys general and industry groups, sued to block it, claiming that the SEC was exceeding its authority. These suits have been working their way through the system, with the Eighth Circuit Court of Appeals presently considering a substantial challenge to the rules. The SEC's choice to drop its defense is a signal that it will no longer be arguing for the rules in court, in effect turning over the case to the judicial branch without further Commission opposition.

For the supporters of the rules, the SEC's move is raising alarms about the future of climate risk disclosure in the United States. Most believe that investors have a right to know how firms are exposed to climate-related financial risks, particularly as climate change continues to affect world economies. The action also represents a wider change in the Commission's direction on climate-related financial rules under its new leadership.

In spite of the defeat, proponents of stricter climate disclosure regulations maintain that the battle is far from over. Investor groups and green groups have pledged to persist in their push for transparency and accountability in business climate reporting. Others are calling on Congress to intervene and lay down clearer regulatory guidelines to make sure that climate risks continue to be a consideration in business disclosures.

At present, the fate of mandatory climate disclosure is anyone's guess. With the SEC no longer making the case for its own regulation, the courts will have to decide whether such rules will prevail or be eliminated. Regardless, the argument for corporate climate disclosure is far from over, and the investor and advocacy group pressure is likely to continue driving the debate in the years to come.