Regulators halt a controversial climate rule after being pelted by 10 legal challenges over it
The SEC announced late Thursday in a court filing that it would stay—meaning pause enforcement of—the climate rule until legal challenges have been resolved by the courts. The regulator is currently facing at least 10 challenges to the rule, including suits from oil companies Liberty Energy and Nomad Proppant Services, as well as the American Chamber of Commerce, which accused the SEC of “micromanaging” business. The SEC cited the “procedural complexities” of the ongoing lawsuits as a motivating factor for its decision to pause the regulation.
The climate rule requires public companies to disclose emissions and other climate consequences of their business operations in regulatory filings, a move criticized by corporations and some in the accounting industry as being unnecessary and adding significant operating costs.
When the SEC first proposed the rule in March 2022, it said it would require companies to disclose emissions from its suppliers and distributors—so-called “Scope 3” emissions—alongside emissions from its own internal operations. Over the following two years, the SEC scaled back Scope 3 reporting requirements after receiving strong industry pushback.
A federal appellate court issued a temporary stay on the rule in March, just a few weeks after the SEC voted to approve the final rule. But that stay was overturned just a week later after cases related to the rule were transferred to the 8th Circuit Court.
Even though the climate rule narrowly approved last month amounted to a watered-down version of the initial proposal, Hortense Viard Guerin, climate risk expert at global consultancy Baringa, told Fortune that legal challenges and a potential stay were predictable.
“It was totally expected,” Viard Guerin said. “It’s still annoying…for companies [that] have been asking for consistency across U.S. regulatory requirements not to have something concrete. I think there was a little bit of hope that when the final rule came, because they’ve been waiting for the final rule for quite a while, it will be sustained. But now it’s back to going back-and-forth.”
In the short term, the stay likely won’t affect most large-and mega-cap companies’ operations. Viard Guerin pointed out that most large American companies already voluntarily disclose their emissions beyond the level that the SEC rule would require because they have operations in Europe or California, both of which require significant climate disclosures.
Companies that will be affected are primarily domestic, small-to-medium-sized firms without a presence in California, who can save on data collection and accounting costs by omitting climate disclosures. But Viard Guerin said that regardless of the outcome of the legal challenges to this rule, the corporate landscape should prepare for an inevitable increase in environmental scrutiny in the coming years.
“Sooner than later, if it’s not the regulator that’s going to ask this question, most likely it’s going to be their investors or their customers,” Viard Guerin said. “So it’s just delaying things that will happen anyway, to be honest, because another stakeholder will ask for it.”
The SEC said in a statement that “a stay avoids potential regulatory uncertainty if registrants were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity,” nodding to the possibility that the rule could be overturned by a federal court.
Viard Guerin said that the SEC’s decision to weaken the final version of the rule likely helps it defend against legal challenges.
“All the work that they’ve done in terms of scaling back was on purpose, to not have big pushback,” Viard Guerin said. “Even if people were probably disappointed by the scale-back, it was on purpose from the SEC—to make sure that they were limited in the scope of the rule, to [make sure] they’re actually making their commitment to investors. Having said that, we are entering into a very interesting year politically, so who knows what’s going to happen next.”
The SEC declined to comment on the stop order.
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