The U.S. Securities and Exchange Commission (SEC) has announced that it’s pausing the implementation of climate reporting rules following several challenges in the U.S. Eighth Circuit Court of Appeals.

The SEC says it will delay enacting the rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions,” according to a stay order issued last week.

However, the SEC maintains its position that the rules are “consistent with applicable law and within the commission’s long-standing authority” to require the disclosure of information “important to investors in making investment and voting decisions.” Thus, the SEC plans to “continue vigorously defending” the rules’ validity in court.

What Are The Rules?

In March, the SEC adopted climate reporting rules that would require many publicly traded companies to disclose their greenhouse gas (GhG) emissions, highlighting sustainability’s growing importance to business operations and the bottom line.

The SEC’s rules require public companies to publish their Scope 1 and Scope 2 emissions. 

  • Scope 1: Direct emissions that occur from sources that are controlled or owned by an organization, such as a company’s machinery.
  • Scope 2: Indirect emissions associated with the purchase of electricity, steam, heat or cooling.

However, the final rules don’t require publicly traded companies to disclose their Scope 3 emissions, which the Environmental Protection Agency (EPA) defines as the result of activities from assets not owned or controlled by the reporting company, but that the company indirectly affects in its value chains.

  • Scope 3 includes the emissions from transporting and distributing products, employee commutes, business travel, etc.

“It's an attempt to set a standard for how companies communicate with investors about GhG emissions, weather-related risks and how they’re preparing for the transition to a low-carbon economy,” says Elizabeth Wimbush, director of sustainability and responsibility at PPAI. “In the past few years, it has become increasingly commonplace for investors to ask for full GhG emissions disclosure, including Scope 3. I suspect that will continue regardless of this ruling.”

Legal Challenges

Within days of the new rules' announcement, the Fifth U.S. Circuit Court of Appeals granted a temporary stay of the regulations following a legal challenge by oil and gas company Liberty Energy Inc. and Nomad Proppant Services LLC.

  • The court lifted its block on March 21 following the selection of the Eighth Circuit as the venue for consolidated suits about the agency's rules.
  • Liberty Energy has since filed another complaint against the SEC in Texas federal court.

Critics argue that the SEC doesn’t have the authority to pass a “climate mandate” and that the rules don’t fully protect shareholders from risks that climate change may pose to their investments.

Iowa Attorney General Brenna Bird, who has led the coalition of states challenging the rules, considered the SEC’s pause a victory. “The SEC’s job is to protect people from fraud. It has no business slapping companies with extremist climate mandates,” Bird said.

“By halting this mandate, we’re protecting businesses from costly red tape, securing our supply chain and defending family farms. Next, we’re going to make this win permanent,” Bird added.

Rule Requirements

The SEC’s final rules would require registrants to make several disclosures, including:

  • Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, operations or financial condition.
  • If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a climate-related risk, it must publish a quantitative and qualitative description of expenditures incurred and impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities.
  • Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a climate-related risk including the use, if any, of transition plans, scenario analysis or internal carbon prices.
  • Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s climate-related risks.
  • Any processes the registrant has for identifying, assessing and managing climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
  • Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operation, or financial condition.

Large accelerated filers (LAFs) and accelerated filers (AFs) that aren’t otherwise exempted must provide information about material Scope 1 emissions and/or Scope 2 emissions. For those required to disclose the emissions, an assurance report at the limited assurance level is also required.