The Fifth Circuit blocks the SEC’s climate disclosure rule in the first legal challenge to the rule

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The Securities and Exchange Commission (SEC) recently voted to approve its highly-awaited climate disclosure rule. However, fewer than 10 days after its finalization, the Fifth Circuit Court of Appeals halted the rule’s implementation by imposing an emergency stay.

The court granted the stay request from two oil companies—Liberty Energy Inc. and Nomad Proppant Services LLC—seeking review of the rule in court. This marked the first major development in the widespread legal opposition to the rule. We should not be surprised by this swift and stringent pushback that the SEC’s rule is facing in the courts.

Outside challenges to the legality of the SEC’s climate disclosure rule were in the works well before the agency released its final version. Over the last two years, the SEC commissioners repeatedly delayed its release, likely (as has been widely speculated by SEC watchers) to pare back the most legally vulnerable aspects of the original draft proposal. These changes made the final rule more durable to protracted legal challenges, particularly by slashing the estimated costs and removing the Scope 3 mandate.

However, this also worked to the SEC’s disadvantage, as the extra time helped many observers and affected parties craft legal arguments in opposition to the rule’s flaws. This helps explain the instantaneous and multipronged challenges to the rule across five circuit courts, including a coalition of 10 state attorneys general. Even the left-leaning environmental organizations Sierra Club and the Natural Resources Defense Council are suing the SEC in federal court for failing to go far enough to compel climate-related information from businesses.

It should also come as no surprise that West Virginia is leading the ten-state challenge to the SEC’s climate disclosure rule. The SEC seems doomed to repeat the fatal mistake the Environmental Protection Agency (EPA) made when it sought to diminish greenhouse gas (GHG) emissions from power plants using a generation-shifting approach. The EPA overstepped its statutory boundaries by seeking to reduce emissions beyond the fence-line of the plants.

The Supreme Court was very clear in West Virginia v. EPA that such an act violated the ‘major questions doctrine’ as the EPA sought to regulate matters of substantial economic concern without congressional authorization. The SEC is repeating this critical error by attempting to regulate corporate disclosure of GHG emissions data without congressional authorization. The scope and effect of the final rule will be economically significant for direct and indirect firm costs.

Beyond the major question doctrine, the SEC’s climate disclosure rule faces a number of other legal vulnerabilities. As I outlined in a recent report, the SEC’s climate disclosure rule violates the DC Circuit’s precedent in National Association of Manufacturers v. SEC (2016). In that case, the court struck down the “conflict-free mineral” provision of the Dodd-Frank Act that enabled the SEC to compel corporate disclosure of controversial or political information.

The climate disclosure rule runs into the same problem by seeking to compel extraneous climate-related information that may fall beyond the boundaries of what is legally deemed “factual or uncontroversial.” The DC Circuit is currently one of several federal courts reviewing challenges to the SEC’s rule.

The Fifth Circuit’s swiftly imposed stay marks an important development in the legal saga for mandatory climate disclosures. It is proof that a federal court deems the regulation to be of substantial importance that warrants immediate review. Depending on the urgency and high level of opposition to the SEC’s authority, the fate of the climate disclosure rule may be decided more quickly than anticipated.