The US Securities and Exchange Commission (SEC) proposed new climate disclosure rules in March that would require public companies to report climate-related impacts and risks on their businesses. The regulator has since received more than 14,500 comments. Filings from 24 Republican attorneys general and some of the nation’s most powerful industry associations suggest those groups are preparing a series of legal challenges after the regulation is finalized, which could happen as soon as next month. “I would expect a lawsuit to be filed immediately once the final rule is issued,” Jill E Fisch, a professor of business law at the University of Pennsylvania, told the Guardian. “They probably already have their complaints drafted and ready to file.” Some opponents claim that requiring companies to publish climate information infringes on their right to free speech. Others (often themselves) say the rule exceeds the SEC’s statutory authority. Both criticisms feature prominently in comments from Republican attorneys general and the U.S. Chamber of Commerce, which spent more than $35 million lobbying the federal government in the first half of 2022, according to OpenSecrets. The Republican letter warns that if the new disclosure requirements are finalized, “capitalism will fall by the wayside.” The SEC’s proposal does not establish an environmental policy or require companies to take climate-related actions beyond making more information available to the public. Objections of free speech and legal authority were met with deep skepticism by legal experts and former SEC officials. In a letter to the committee, John Coates, a Harvard Law School professor and former SEC general counsel, said that instead of challenging the climate disclosure rule on its merits, “critics have resorted to mischaracterizing the proposal and invent their own, imaginary rule. “. In another letter, a bipartisan group of former SEC officials, legal scholars, securities law experts and corporate lawyers noted that “the SEC has mandated environmental disclosure since at least the Nixon administration.” While not all of the letter’s authors support the substance of the rulemaking, they agreed without exception “that there is no legal basis to challenge the Commission’s authority to compel public company climate disclosures.” “The SEC is publishing a disclosure rule that is square within its wheelhouse,” said Fisch, of the University of Pennsylvania. “It is exactly what Congress told him to do, and which he has done consistently since 1933.” But legal authority and free-speech charges, weak as they are, aren’t the only reasons opponents of the climate disclosure rule have hinted at litigation. In a recent analysis, the Guardian revealed how the Business Roundtable, a lobbying group for CEOs of America’s biggest companies, opposes a key provision of the SEC proposal that would require some large companies to measure and report the emissions produced at all their supply chains – known as Scope 3 emissions. Diagram showing the difference between Field 1, 2 and 3 emissions. In addition to questioning the substance of the rule, the Business Round Table also rejects the SEC’s estimate of how much it will cost businesses to comply. (The agency said in an email that its comments “[are] focused on identifying challenges to the proposed rule in the hope that the SEC would address them.) The SEC predicts that companies will face $490,000 to $640,000 in compliance costs in the first year of climate reporting and less in subsequent years. (By comparison, a 2019 study predicted that climate change could cost businesses about $1 trillion over the next five years.) A detailed assessment by Shivaram Rajgopal, professor of accounting and auditing at Columbia Business School, concluded that even without considering the benefits of the climate disclosure rule, the costs would prove negligible for most companies. “The loss in market capitalization, if any, from compliance costs is likely too small for any outsider to detect and separate from day-to-day volatility in stock returns for unrelated reasons,” Rajgopal wrote. Last quarter ExxonMobil earned nearly $18 billion in profit, the biggest quarterly profit in the company’s history. During the same period, General Motors generated more than $35 billion in revenue, while Walmart reported nearly $153 billion in revenue. The Economist recently reported that after-tax corporate profits as a share of the US economy have risen to their highest level since the 1940s. ExxonMobil, GM and Walmart are members of the US Chamber of Commerce and the Business Roundtable. According to a report from the nonprofit Center for Political Accountability, during the 2020 election cycle each company donated at least $125,000 to the Republican Attorneys General Association, which supports the political campaigns and legal agendas of GOP attorneys general across the country . In their letter to the SEC, 24 of those attorneys general called the commission’s cost-benefit analysis “woefully incomplete” and warned that finalizing the climate disclosure rules “will undoubtedly create legal challenges.” The Business Roundtable, meanwhile, described the analysis as “fundamentally flawed” and said its member companies “believe [the costs of the rule] will be orders of magnitude larger than what the SEC estimates.” The chamber issued a similar condemnation, writing in its voluminous report that the SEC’s “economic analysis … is incomplete and materially underestimates the cost of compliance.” Asked for comment, neither agency specifically responded to questions about whether it planned to take legal action against the SEC if the final rule is not significantly changed. Trade associations might be expected to instinctively oppose the new regulations, but in the past such statements have proved little more than routine political rhetoric. In many cases, in response to past rulemakings, the chamber and the Business Roundtable have successfully sued the SEC on cost-benefit grounds. In 2011, following a lawsuit filed by the two groups, the D.C. Circuit struck down an SEC rule that would have made it easier for shareholders to vet new board members for public companies, calling the rule “arbitrary and capricious.” The decision in Business Roundtable v. SEC said the commission “neglected its statutory obligation to assess the economic consequences of its rule,” citing, among other things, a cost estimate submitted to the SEC by the chamber. In their comments on the climate disclosure proposal, the Republican attorneys general and the chamber each cite Business Roundtable v SEC arguing that the SEC’s cost-benefit analysis is flawed. The Republican letter is co-authored by Patrick Morrisey, the attorney general of West Virginia, who recently ordered a successful legal challenge to the Environmental Protection Agency (EPA). In West Virginia v. EPA, the Supreme Court adopted a relatively new legal concept—the so-called “big questions doctrine”—to stop an EPA effort to regulate greenhouse gas emissions from power plants. As the Bulletin of the Atomic Scientists explained, “Under this doctrine, when a regulation crosses a certain threshold of being ‘major’—a line that remains poorly defined—the court strikes down the regulation unless it is clearly authorized by Congress ». The major questions doctrine appears to be the basis of Morrisey’s campaign against the climate disclosure rule. In a July television appearance, Morrisey said the Biden administration “can’t get congressional majorities behind their policies, so they’re trying to resort to [regulations]. But as we saw with West Virginia v. EPA, I don’t think the courts are going to let that happen.” (Morrisey’s office did not respond to emails seeking comment.) “I don’t think there is any natural reason to draw this court decision [in West Virginia v EPA] would have any implications for the SEC,” said Jill Fisch of the University of Pennsylvania. “At the same time, you can read the West Virginia case and you can say, ‘This is part of the Supreme Court and the federal courts in general looking at government agencies differently. This is a cut in the fourth branch, in the power of the administrative state.’ And if this is true, in theory, everything is ready.” “Historical legal precedent suggests that the SEC has a pretty strong case,” said Tyler Gellasch, president and CEO of the nonprofit Healthy Markets Association. “But if you’re the Business Round Table, you don’t necessarily need historical legal precedent on your end. You just need a court today. And that seems much more likely today than it would have been at any time in modern history.”
