Obscuring the SEC’s climate disclosure rule may invite a host of legal problems

The US Securities and Exchange Commission’s (SEC) pending climate disclosure rule has been delayed yet again. The climate disclosure rule will require publicly traded companies to quantify and disclose how climate change risk factors impact their operations and financial health. The SEC rule will also require a periodic disclosure of how the company’s board of directors mitigate the “material” risks of climate change. 

Following the October 2023 delay, the climate disclosure rule will likely not be finalized until the Spring of 2024 and, thus, take effect in 2026. Absent any clear explanation, many have speculated that the Commission is merely buying time to develop a durable legal defense to the more vulnerable aspects of the rule. Others suggest that, ahead of looming legal challenges, the SEC is gutting the most controversial provisions of the rule, such as its “Scope 3” and S-X line item requirements.

Despite what we know about the rule, there is much we do not know. And, this may be by design. The SEC faces a major issue as to how the rule is framed before the public. The Commission has yet to provide an explanation as to why its rule features two distinct pages for public comments. 

One page features a portal that received comments relating to mandatory climate disclosures submitted between April 2021 and June 2022. The portal begins with a series of memoranda by senior SEC officials hosting stakeholder meetings to discuss climate disclosures. 

What follows is a list of 762 public comments—both in favor and opposed—to the SEC on whether it should mandate such disclosures. Yet, at the beginning of the page, the SEC claims that 5,786 comments were filed, split across four letter types (A-D). It is unclear if these 762 comments are included within the 5,786 count, since, topically, each of the letter types only provides arguments favorable to the SEC mandating climate disclosures. 

Even more problematic is why the SEC only categorized each of the letter types as favorable to the climate disclosure rule. There were (and continue to be) many stakeholders publicly opposed to the climate rule. The featured 762 comments do not begin to capture the many thousands of letters submitted to oppose or challenge the SEC’s rule. 

Transparency is needed to explain why the SEC has solely categorized and exclusively framed comments favoring the rule. 

The SEC’s second comment page on the climate disclosure rule is even more concerning. This commenting period was opened during the rule’s announcement in March 2022. The SEC continues to accept comments well beyond its published deadline of November 1, 2022. 

Unlike the first page, this one categorizes all letter types, accounting for the thousands of comments made both for and against the rule. Despite this, the growing number of comments catalogued each week reveals how the SEC has violated its own published deadline. 

The rule’s second and final deadline officially ended on November 1st, 2022. Yet, the Commission continues to accept and post additional comment letters – now over 15,000 and counting. Like the first comment page, the SEC has provided zero explanation for this perplexing format. To date, there have been 100 comments submitted after the rule’s official deadline. The resulting confusion and uncertainty expose the agency to a host of legal issues.

The SEC is legally obligated under the Administrative Procedure Act to consider every public comment submitted to it before the deadline. This requirement is subverted when the SEC continues to solicit new comments well beyond this. Once the rule is published, it may (and likely will) become the object of a legal challenge on procedural, statutory, and/or constitutional grounds. As part of such a proceeding, plaintiffs will have the opportunity to point to every new comment that the agency accepted after the deadline – but couldn’t possibly have considered because the rule was already mostly written – as cause to invalidate it. 

According to Justia, the APA requires that “the final rule must include analyses of any relevant data or other materials submitted by the public and a justification of the form of the final rule in light of the comments the agency received.”

Another legal vulnerability lies with the rule’s controversial Scope 3 requirement. Scope 3 captures greenhouse gas (GHG) emissions not from the company itself, but from the activities used to manufacture and distribute a good or service associated with the company. 

Scope 3 establishes the SEC as an unsanctioned climate regulator, where the agency assumes that it can compel GHG emissions data from non-registered private companies across the registrant’s value chain. 

If the rule becomes finalized in its current state, the SEC would unilaterally extend its jurisdictional reach. This would introduce a radical new disclosure-based framework over the many thousands of private firms that do business with the 6,920 companies disclosing to the agency.

Thus far, the SEC has failed to explain why requiring Scope 3 disclosure is legally permissible and presumptively material to every company. The rule’s ostensible objective is to assess climate-related risks across registered firms themselves, but the Scope 3 requirement opens up a separate can of worms. Companies will struggle to capture GHG exposure from the far-reaching activities of the many non-registered firms who are their business-to-business suppliers, customers, and partners, and are unfamiliar with the SEC’s aggressive compliance expectations. 

It almost goes without saying that the SEC has no business collecting corporate data on unregistered entities. When a registered company captures emissions data across its value chain, this inevitably will include critical product-development information about its private suppliers, service providers, and facilities. 

While the SEC’s rule only requires direct disclosure from public companies, Scope 3 introduces a non-transparent back-channel for indirect disclosure of emissions data by the unregistered firms for inclusion into the registrant’s disclosure.

This may imperil the SEC if a reviewing court finds that the agency over-extended its statutorily defined disclosure framework to indirectly regulate unregistered firms. Such an act may well violate the compelled speech doctrine if unregistered firms allege coercion from providing vulnerable information they would not otherwise disclose to the registrant.

The SEC’s proposed climate disclosure rule would be a massive enhancement of unsanctioned administrative power, both in terms of predicted costs and regulatory reach. The rule has suffered repeated delays that are likely tethered to the legal uncertainty of the Scope 3 requirement. 

The convoluted dual commenting pages only further confuse and obscure the role of public opinion on the Commission’s work. If nothing is changed, both Scope 3 and the agency’s misbranding of public comments may expose it to serious legal jeopardy.

This article was originally published on the Regulatory Transparency Project’s blog.