Republicans plan legal assault on climate disclosure rules for public companies
"The SEC’s proposed new rules, which would require public corporations to disclose climate-related information, have been critized by industry groups
Republican officials and corporate lobby groups are teeing up a multi-pronged legal assault on the Biden administration’s effort to help investors hold public corporations accountable for their carbon emissions and other climate change risks.
The US Securities and Exchange Commission (SEC) proposed new climate disclosure rules in March that would require public companies to report the climate-related impact and risks to their businesses.
The regulator has since received more than 14,500 comments. Submissions from 24 Republican state attorneys general and some of the country’s most powerful industry associations suggest that these 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 litigation challenge to be brought immediately once the final rule is released,” Jill E Fisch, a business law professor at the University of Pennsylvania, told the Guardian. “They probably have their complaints already drafted, and they’re ready to file.”
Some opponents claim that requiring companies to publish climate-related information infringes on their right to free speech. Others (often the same ones) say that the rule exceeds the SEC’s legal authority.
Both critiques feature prominently in comments from the Republican attorneys general and the US Chamber of Commerce, which spent more than $35m 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 proposal does not establish environmental policy or require that companies take any climate-related actions other than making more information publicly available.
The free speech and legal authority objections have been met with profound skepticism from legal experts and former SEC officials.
In a letter to the commission, 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 inventing their own, fictional 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 at least as far back as the Nixon administration.” Even though not all of the letter’s authors support the substance of the rulemaking, they agreed without exception “that there is no legal basis to doubt the commission’s authority to mandate public-company disclosures related to climate.”
“The SEC is promulgating a disclosure rule that’s square within its wheelhouse,” said Fisch, of the University of Pennsylvania. “It’s exactly what Congress told it to do, and which it has done consistently since 1933.”
But the legal authority and free speech charges, however tenuous, are not the only grounds on which 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 emissions generated throughout their supply chains – known as Scope 3 emissions.
In addition to challenging the substance of the rule, the Business Roundtable also rejects the SEC’s estimate of how much it would cost businesses to comply. (The organization said in an email that its comments “[are] focused on identifying challenges in the proposed rule in the hopes the SEC will address them.”)
The SEC projects that companies will face compliance costs of $490,000 to $640,000 in the first year of climate reporting, and less in subsequent years. (By comparison, a 2019 study predicted that climate change could cost firms around $1trn over the following five years.)
A detailed assessment from Shivaram Rajgopal, Columbia Business School professor of accounting and auditing, concluded that even without taking into account any benefits from the climate disclosure rule, the costs would prove negligible for most firms. “The loss in market capitalization, if any, from compliance costs is likely too tiny for any outsider to detect and to separate from daily volatility in the stock returns for unrelated reasons,” Rajgopal wrote.
Last quarter ExxonMobil earned nearly $18bn in profit, the largest quarterly earning in the company’s history. Over the same period, General Motors generated more than $35bn in revenue, while Walmart reported revenues of nearly $153bn. The Economist recently reported that after-tax corporate profits as a share of the US economy have surged 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 these attorneys general called the commission’s cost-benefit analysis “woefully unfinished” and warned that finalizing the climate disclosure rules “will undoubtedly draw legal challenges”.
The Business Roundtable, meanwhile, described the analysis as “fundamentally flawed” and said that its member companies “believe [the costs of the rule] will be orders of magnitude more than what the SEC estimates.” The chamber issueda similar condemnation, writing in its voluminous submission that the SEC’s “economic analysis … is incomplete and substantially underestimates compliance costs.”
Asked to comment, neither organization responded specifically to questions of whether it planned to pursue legal action against the SEC if the final rule is not changed significantly.
Trade associations might be expected to instinctively oppose new regulations, but in the past such statements have proven to be more than routine political rhetoric. On multiple occasions in response to prior rulemakings, the chamber and the Business Roundtable have successfully sued the SEC on cost-benefit grounds.
In 2011, following a suit filed by the two groups, the DC circuit struck down an SEC rule that would have made it easier for shareholders to consider new board members for public companies, deeming the rule “arbitrary and capricious”. The decision in Business Roundtable v SEC said that the commission “neglected its statutory obligation to assess the economic consequences of its rule”, citing, among other figures, 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 in claiming that the SEC’s cost-benefit analysis is flawed.
The Republican letter is co-led by Patrick Morrisey, the West Virginia attorney general who recently helmed a successful legal challenge to the Environmental Protection Agency (EPA).
In West Virginia v EPA, the Supreme Court endorsed a relatively novel legal notion – the so-called “major questions doctrine” – to halt 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 which remains poorly defined – the court rejects the regulation unless it has been clearly authorized by Congress.”
The major questions doctrine looks to be the basis of Morrisey’s campaign against the climate disclosure rule. In a July TV appearance, Morrisey said that the Biden administration “can’t get the congressional majorities behind their policies, so they’re trying to resort to the [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 requesting comment.)
“I don’t think there’s any natural reason to infer that the court’s decision [in West Virginia v EPA] would have any implications for the SEC,” said the University of Pennsylvania’s Jill Fisch. “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 generally, taking a different look at government agencies. This is cutting back on the fourth branch, on the power of the administrative state.’ And if that’s true, in theory, everything is up for grabs.”
“Historical legal precedent suggests that the SEC has a pretty strong case,” Tyler Gellasch, the president and CEO of the nonprofit Healthy Markets Association, said. “But if you’re the Business Roundtable, you don’t necessarily need historical legal precedent on your side. You just need a court today. And that seems far more likely today than it would have been at any time in modern history.”