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US Securities and Exchange Commission

In Wake of Supreme Court Emissions Decision, SEC Climate Disclosures Seen on Firmer Ground than EPA Plan

Bill Flook  Editor, Accounting and Compliance Alert

· 8 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 8 minute read

Critics of the Supreme Court’s June 30, 2022, decision in West Virginia v. EPA – curtailing the Environmental Protection Agency’s (EPA) ability to limit power plant emissions under a provision of the Clean Air Act – warned the ruling could have far-reaching consequences across other government efforts to combat climate change. But environmental and securities law experts see key differences with the SEC’s own climate risk disclosure rulemaking that put it on stronger legal footing.

In the 6-3 decision, Chief Justice John Roberts, writing for the majority, portrayed the EPA as discovering new authority under Section 111(d) of the Clean Air Act – a rarely-used “ancillary provision” of the law designed as a gap filler – to “substantially restructure the American energy market.”

“And the agency’s discovery allowed it to adopt a regulatory program that Congress had conspicuously and repeatedly declined to enact itself,” Roberts wrote, declaring West Virginia v. EPA a “major questions case.”

Under the major questions doctrine, administrative agencies need clear authorization from Congress in order to implement regulations with major economic or political significance.

The ruling sparked widespread alarm among progressives who saw a conservative-majority court wielding the same doctrine to squeeze the administrative state’s power on climate change regulations and other areas. Senate Banking Committee Sherrod Brown, an Ohio Democrat, in a statement predicted “the reasoning in this case will set us back decades in the fight against climate change and will reverberate throughout our government, making it harder to protect families and communities.” Sen. Robert Menendez, a New Jersey Democrat, in a separate statement warned the ruling “opens the door to far-reaching implications for how other federal agencies generally create regulations to implement existing legislation moving forward.”

“The decision is actually going to put more attention and pressure on the SEC disclosure rules than would have even been the case before,” said Stan Meiburg, former EPA acting deputy administrator who is now director of Wake Forest University’s graduate programs in sustainability. “This is only going to up the stakes because the decision …effectively takes away one of the other tools that the executive branch would have had to try to address carbon emissions in the utility sector. So it will increase that tension.”

The SEC’s own climate rules, proposed in March in Release No. 33-11042The Enhancement and Standardization of Climate-Related Disclosures for Investors, are widely expected to face legal challenge from opponents who argue the commission is going beyond its narrow statutory authority to require disclosures related to financial materiality. Foes of the SEC’s rulemaking are already looking to translate the reasoning in Robert’s West Virginia v. EPA opinion to the commission’s own efforts. In a news release statement, Competitive Enterprise Institute Senior Fellow Marlo Lewis said the Supreme Court decision imperils the Biden administration’s “whole-of-government” climate approach, and added that the SEC and other regulators “all now aspire to regulate markets and capital investment for climate policy purposes.”

“Yet Congress never spoke directly to climate change in any of those agencies’ enabling statutes,” he said. “Indeed, the terms ‘climate,’ ‘global,’ ‘warming,’ ‘greenhouse,’ ‘carbon,’ ‘environment,’ ‘pollutant,’ and their cognates do not occur in the” Securities Exchange Act of 1934 and certain other enabling statutes.

Commissioner Hester Peirce, in part of her dissenting statement on the proposal arguing why the SEC lacks the authority to propose the rule, cited the late Justice Antonin Scalia’s 2014 opinion in Utility Air Regulatory Group v. EPA, another Clean Air Act case: “When an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism,” Scalia wrote. “We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast ‘economic and political significance.’” Roberts, in his West Virginia v. EPA opinion, leaned on some of that same language.

But George Georgiev, an associate professor at Emory University School of Law whose research includes SEC disclosures, does not believe SEC rules implicate the major questions doctrine as long as they are investor focused, “which is the case for the climate rules.”

“The SEC’s authority is clearly established, it has been exercised consistently and continuously, and the disclosure initiative is considerably more modest than other types of regulation,” he wrote by e-mail. “It concerns only information (as contrasted with behavioral mandates) and it only applies to firms that have elected to go public (as opposed to all firms across the economy).”

The SEC’s proposal, which relies on its authorities under the Securities Act of 1933 and Exchange Act, would require public companies to provide investors with more detailed disclosures on climate risk and greenhouse gas (GHG) emissions, including, in some cases, so-called “Scope 3” indirect emissions. The commission voted 3-1 in March to issue the proposal. (See SEC Votes to Propose Climate Risk Disclosures in the March 22, 2022, edition of Accounting & Compliance Alert.)

The proposal, according to Georgiev, “is very much in line with what the SEC has been doing for close to 90 years: investor-oriented disclosure about risks faced by firms, their operational and financial performance, and their governance arrangements.”

“The subject matter here – climate – is merely incidental to the core informational function of the proposed rules,” he wrote. “The SEC has over the years required disclosure of various matters, from related-party transactions to executive compensation to statistical data about asset backed securities to Y2K risks/planning to human capital management without those specific categories being mentioned in congressional mandates.”

Scott Schang, director of Wake Forest Law’s Environmental Law and Policy Clinic, wrote by e-mail that there is “a good bit of uncertainty how far this court will take the” major questions doctrine.” But he is less worried than some that the opinion in West Virginia v. EPA heralds a major expansion of the doctrine, noting that Section 111(d) of the Clean Air Act “was stretched quite far by the Obama EPA because they simply didn’t have any other good alternatives to address utilities’ GHG emissions.” Legally, he wrote, Roberts “was not far off the mark in noting that this was a fairly significant expansion of EPA authority that the Agency found in a provision that had been around for decades.”

“I don’t think, as a result, that this necessarily means the SEC climate rules will be met with the same fate,” he wrote. “Climate impacts are highly material to some companies, and the SEC rules simply call that out. To me, the SEC climate regs are an example of the SEC seeing a new threat and applying the definition of materiality to it, not of finding that some provision of their statutes suddenly is found to allow them to regulate an entire industry in a brand new, never before conceived of manner.”

He predicted it would be far easier for the SEC to demonstrate and explain to a skeptical court the nexus between its authorizing statute and the climate rules than for the EPA’s Section 111(d) authority.

“I think Justice Roberts, at least, would see EPA’s and the SEC’s actions quite differently,” he wrote. “I hope some of the other five conservative jurists would apply clear legal reasoning to find the same, but I have to admit I’m concerned these five may be feeding off of each other and creating some off-the-wall jurisprudence in the years to come. That remains to be seen.”

Likewise, Meiburg said there will doubtlessly be a push by the fossil fuel industry to make claims that what the SEC is doing is going to invoke the major questions doctrine, that “if Congress had really wanted the SEC to do that, they would have had to say that explicitly in legislation.”

“But the case I think is not going to be as compelling.”


Editor’s Note: This article was updated on July 6, 2022, to include a statement from the Competitive Enterprise Institute.


This article originally appeared in the July 5, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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