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Federal Appeals Court Issues Temporary Stay of SEC’s Climate Disclosure Rules

By:
S.J. Steinhardt
Published Date:
Mar 19, 2024

A federal appeals court has temporarily stayed the Securities and Exchange Commission (SEC)’s new climate-disclosure rules for public companies, multiple news organizations reported. The rules are the SEC's response "to investors’ demand [for] more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks," the SEC stated in its announcement of the rules.

The U.S. Chamber of Commerce, which represents a wide cross-section of industries, filed suit in the U.S. Court of Appeals for the Fifth Circuit this week to stop the rules, calling them unconstitutional. The court granted an emergency stay in a case brought by two fracking companies, Liberty Energy and Nomad Proppant Services.

“There is no clear authority for the SEC to effectively regulate the controversial issue of climate change,” the two companies wrote in their petition, The New York Times reported. They were “arbitrary and capricious,” the two companies said, and violated the First Amendment, which protects free speech, by “effectively mandating discussions about climate change.”

In addition, the rules would cost companies “irreparable injury in the form of unrecoverable compliance costs,” they said.

The SEC objected to the stay, arguing that the request was premature, the Times reported, since companies wouldn’t be required to make climate disclosures until March 2026. The SEC pointed out in response to the lawsuit that Liberty Energy was already disclosing climate-related risks as a publicly traded company, Accounting Today reported.  In fact, many public companies are already disclosing some of their climate risks because of recent requirements in California and the European Union and due to pressure from shareholders.

This is the first in a series of legal battles facing the SEC over the rules. The agency also faces lawsuits from groups of attorneys general in 19 Republican-led states, as well as a lawsuit from the Sierra Club and other environmental groups, which do not believe the rule goes far enough, Accounting Today reported.

“As climate impacts like wildfires, floods, and drought disrupt every facet of the U.S. economy, the SEC chose to bury its head in the sand instead of requiring companies to show the full climate risks they pose,” said Hana Vizcarra, an attorney at Earthjustice, one of the environmental groups that sued the SEC, in an interview with the Times.

But, while litigation over the rule is likely to cause some companies to delay compliance plans, others still see a need to prepare for the March 2026 deadline set by the SEC, said lawyers interviewed by The Wall Street Journal. “I don’t think it’s going to fundamentally change the trajectory,” said Margaret Farrell, chair of law firm Hinckley Allen’s securities law group, in an interview with the Journal. “There is an obligation, which the SEC underscored a few years back, to consider the impact of climate change and climate events on the business, regardless of the new rule.”

Uncertainty around the fate of the SEC’s climate rule, particularly given the presidential election in the United States, combined with extended compliance deadlines, could cause some companies to take a wait-and-see approach to the litigation, Farrell added.

Nonetheless, large companies in industries affected by extreme weather and other results of climate change  should continue to prepare for the new requirements, she advised. “It is a bit of a wait-and-see, but I wouldn’t do nothing,” she said.