WASHINGTON, DC – SEPTEMBER 28: Guardian of the Law or Authority, created by sculptor James Earle … [+]
When the U.S. Securities and Exchange Commission adopted climate-related disclosure rules in March, a series of lawsuits challenged the commission’s ability to adopt the rules. The commission argued that Congress gave it the authority to adopt the rules, but delayed implementation until the courts resolved the issue. Under previous legal standards, the commission’s authority had been questioned. But new standards adopted by the U.S. Supreme Court on June 26 make the rules almost certain to be struck down.
As international attention on climate change has increased since the Paris Agreement came into force, so has pressure on companies to be accountable for their climate and environmental policies. This has resulted in an increase in environmental, social, governance and sustainability reports produced by companies to showcase their green initiatives.
By 2020, producing such reports had become standard practice for both public and private companies. But there was no standardization of the content. Companies could include whatever they wanted, from environmental policies to LGBTQ+ initiatives. This lack of standardization was problematic, especially as ESG became an increasingly factor in financial reporting and investment strategies.
Regulators have rushed to create sustainability reporting standards. In 2021, the International Sustainability Standards Board drafted the International Financial Reporting Standards Foundation’s Sustainability Disclosure Standard. IFRS is an independent non-profit organization that develops financial reporting standards, including international accounting standards. IFRS is not used in the United States, which uses Generally Accepted Accounting Principles, also known as GAAP, but is used in 132 jurisdictions. IFRS standards were adopted in June 2023 as the global standard for sustainability and climate change reporting, including greenhouse gas emissions.
In March 2022, the SEC proposed to develop climate-related reporting standards. The final rules, adopted on March 6, 2024, would require large publicly traded companies to disclose their climate change initiatives, greenhouse gas emissions, and the financial impacts of severe weather. The rules were originally scheduled to take effect in 2026.
Following this rule, five notable lawsuits were filed against the SEC. Iowa vs. SEC, Petition to Pastor in Energy Company Lawsuit, West Virginia vs. SECand Sierra Club v. SEC. Conservative states argue the rule is an overreach. The Sierra Club says it doesn’t go far enough. Eventually, the various lawsuits will be consolidated and heard as one case in the U.S. Supreme Court.
The conservative case revolves around the fundamental issue of separation of powers and delegation of authority. Broadly speaking, the legislative branch passes laws, the executive branch implements them, and the judiciary interprets them. So it’s Congress’ job to write the laws. But Congress isn’t good at detail. Because Congress is too lazy, it passes broad laws and then delegates the drafting of the finer details to executive branch agencies like the EPA and SEC. These agencies are only allowed to act within the scope of the authority delegated to them by Congress.
Interpretations of that authority vary widely, and sometimes the laws are not well written. Since 1984, interpretations of agency authority have been based on the case of Chevron v. Natural Resources Defense Council. The Chevron case involved oil companies challenging the Environmental Protection Agency’s interpretation of the permitting provisions of the 1977 Clean Air Act.
This case created a standard for how courts review agency authority to act. First, courts look at the original statute to see what Congress intended and whether the language was ambiguous. If the language is not clear, courts look at the agency’s interpretation. If the agency’s interpretation is reasonable or reasonable, it will be deferred to. This is known as the Chevron principle, and is sometimes called Chevron deference or Chevron two-step.
For those with strict views of separation of powers and delegation of authority, the Chevron doctrine has been problematic. Executive branches have been pushed to the limits of their power and respected. But the current Supreme Court takes a narrower view of agency power. A series of cases have made it clear that the Supreme Court is moving to overturn the Chevron doctrine. And on June 28, the Supreme Court did just that.
In the combined case Relentless v. Department of Commerce and Roper Bright Enterprises v. RaimondoThe 6-3 majority decision overturned the Chevron decision, which increases the burden for agencies to prove they have the authority to make rules, a major issue for the SEC when it comes to climate-related disclosure rules.
The original proposed rule asserted that the SEC has the authority to establish disclosure requirements that are “necessary or appropriate in the public interest or for the protection of investors.”
Additionally, the Commission stated that “investors need information about climate-related risks, and it is within the Commission’s authority to require such disclosure in the public interest and for investor protection because climate-related risks involve current financial implications that public company investors consider when making investment and voting decisions.”
In my opinion, the courts will find that the SEC overstepped its authority in adopting climate-related disclosure rules. When climate-related disclosure or sustainability reporting is enacted in the United States, it is done at the state level or through Congressional legislation.
