It took Gary Gensler’s SEC two years to get a rule requiring companies to disclose their climate impacts approved, but it’s only taken days for opponents to file legal challenges.
The commission approved the controversial new climate disclosure rule in a 3-2 vote last week, and it will require companies to disclose in annual reports the impact of climate change on their businesses, from HVAC to transportation emissions. Up to now, investors have relied on voluntary climate disclosures to assess companies’ climate risk. The SEC argued that mandating timely and accurate disclosures was necessary, given that investor interest in climate issues has increased.
The legal pushback has been predictable and swift—but not entirely uniform. Ten Republican state attorneys general sued just hours after the SEC voted to approve the rule on March 6, seeking to get the rule thrown out. Nine more state AGs joined them on Tuesday, along with the American Free Enterprise Chamber of Commerce, a little-known organization chaired by Donald Trump’s former U.S. Ambassador to China, Terry Branstad. And yesterday, the Sierra Club, an environmental organization, announced it would be mounting a challenge from the other side of the aisle, arguing that the standards the rule mandates don’t go far enough.
“The Commission undertakes rulemaking consistent with its authorities and laws governing the administrative process and will vigorously defend the final climate risk disclosure rules in court,” wrote an SEC spokesperson in an email to Fortune.
The SEC initially proposed a strong version of the rule that would have required companies to disclose emissions generated by their own manufacturing and distribution processes—so-called “scope 1” and “scope 2” emissions—as well as “scope 3 emissions,” which include things like the downstream climate impacts from other organizations that use a company’s products, on their 10-K forms. The inclusion of scope 3 emissions drew heavy backlash from big industry players and accounting firms, who argued that the costs of quantifying and reporting downstream emissions would be unfairly large.
“Gathering this data can be a tremendously time-consuming process that relies on coordination across many different departments,” wrote Bill Harter, Principal ESG Solutions Advisor at Visual Lease, in an email to Fortune.
The SEC faced another setback when some of the country’s biggest asset managers, including State Street and Pimco, left the Climate Action 100+ advocacy group last month, undercutting the SEC’s argument that implementing a strong climate rule was necessary because investors were increasingly climate-conscious. The version of the rule that the SEC voted on last week was a heavily watered-down version of the original—a retreat that the Sierra Club is arguing violates the organization’s legal mandate.
“This lawsuit is consistent with comments we filed back in 2022,” Sierra Club senior attorney Andres Restrepo told Fortune, referring to comments the Sierra Club filed in 2022 arguing for a strong climate rule that included scope 3 emissions. “The SEC, under its statutory obligations, is required to issue rules and regulations that protect investors.”
The Sierra Club is calling for the SEC to enforce the climate law as it was passed, and also revisit the terms and consider strengthening it. It’s arguing that because the SEC has a mandate to protect investors, and climate change presents risks to the financial system, the SEC should be required to demand maximum climate transparency on companies’ financials in order to best inform investors.
“We don’t think [the rule] is legally adequate, but what the SEC did finalize is…important,” Restrepo said.
The majority of the legal pushback has alleged the opposite: all 19 Republican attorneys general said in a filing that the SEC went above its authority in passing the rule, which they argued would unfairly burden businesses by adding additional accounting work for them to quantify and report their climate risks.
“While the administration and SEC has made some changes to the proposed rule, what they’ve released today is still wildly in defect and illegal and unconstitutional,” said West Virginia Attorney General Patrick Morrisey in a press conference immediately after the rule was approved.
