New SEC Climate Rules Likely To Come Under Intense Scrutiny as an Example of ‘Regulatory Overreach’

‘The SEC has turned into a ‘regulate everything’ agency,’ one critic of the new rules says.

Evelyn Hockstein-Pool/Getty Images
The chairman of the Securities and Exchange Commission, Gary Gensler, at an oversight hearing on September 14, 2021. Evelyn Hockstein-Pool/Getty Images

New rules from the Securities and Exchange Commission requiring companies to report their greenhouse gas emissions are poised to unleash a wave of litigation against what critics see as a clear case of regulatory overreach.

The rules, released by the SEC last week, require regulated issuers to disclose information regarding their greenhouse gas emissions and other climate-related information. Ten states have already filed a petition for review in the 11th Circuit of the United States Court of Appeals to challenge them. Many publicly traded companies subject to compliance could also sue as the cost of compliance with climate regulations skyrockets. 

The development underscores the expansion of regulatory powers by federal agencies, a trend that has intensified during the Biden administration.

The Federal Trade Commission has come under scrutiny for political “bias.” The regulatory powers of the National Marine Fisheries Service are under review by the Supreme Court in a case that looks likely to scale back Chevron deference, the tradition of courts deferring to executive branch regulators, which critics say gives the administrative state too much influence over American economic life. 

“Most government agencies are claiming powers that would’ve been unthinkable even 10 years ago,” a senior counsel at the New Civil Liberties Alliance, Peggy Little, tells the Sun. “Lawless” is how she describes the new rules, arguing that climate-related regulations should rest with the Environmental Protection Agency or state-level departments of environmental protection. “The SEC has turned into a ‘regulate everything’ agency,” she adds.

Critics say that the SEC bypassed the rule-making requirements of the Administrative Procedure Act and that the rules are outside the agency’s authority. The SEC’s mission is to help investors make informed decisions and to prevent fraud — not to judge whether companies are making investments that help or hurt the climate, a fellow on energy and environmental policy at the Heritage Foundation, Diana Furchtgott-Roth, tells the Sun. 

“These rules are going to be challenged on the ground that they are contrary to what the original statute intended,” Ms. Furchtgott-Roth says. Section 6(b)(5) of the Securities Exchange Act of 1934 affirms that the national securities exchange serves, among other duties, to “prevent fraudulent and manipulative acts and practices” and “in general, to protect investors and the public interest.”

“Climate change in the future is a risk to be managed, but this gives the SEC a huge amount of power to decide on its own what it thinks is dangerous,” Ms. Furchtgott-Roth says. “It has substantial implications for the economics of how companies invest, the productivity of the United States, the power of government, the power of these agencies to make unpredictable decisions.”

The full range of legal challenges that will be brought on by American states remains to be seen, a partner at the law firm Ropes & Gray, Michael Littenberg, tells the Sun. “The only certainty,” he says, “is that we will see more challenges to the rules, likely from both the right and the left.”

The new requirements, though, are much weaker than what was initially proposed in 2022. The SEC received tens of thousands of public comments both supporting and objecting to that proposal. Republican state attorneys general threatened lawsuits, so the commissioners dropped the part of the rules that asked companies to report emissions generated from their supply chain and customers’ use of their products.

As they stand now, the regulations require larger companies to disclose emissions from their operations and energy use if the information is deemed relevant to an investor’s decision-making. The chairman of the SEC, Gary Gensler, said the rules represent a “basic bargain” between investors and companies, one that has shifted over the last 90 years of the agency. The SEC’s public affairs office referred the Sun to Mr. Gensler’s statement.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” Mr. Gensler said. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”

The regulations are likely to prompt many public companies to add accounting policies, internal controls, and climate disclosures into their existing procedures, Mr. Littenberg, who has advised companies on compliance with “Environmental, Social, and Governance” standards, says. The SEC estimates this will affect roughly 2,800 American companies and 540 foreign companies with business here, which will be required to report on the risks and effects of greenhouse gas emissions.

“Putting aside the merits of the various positions, there needs to be a better approach to developing public company disclosure requirements,” Mr. Littenberg says. “The process seems broken when a disclosure rule requires three years and a door-stopping 886-page Adopting Release.”

One SEC commissioner, Hester Peirce, opposed the rules on the grounds that they would be burdensome and expensive for companies. Although it’s often easier for companies to abide by regulations and pass along the burden to the consumer, the price of climate compliance, adding to the cruel costs of inflation, will be difficult for industry leaders to ignore. “It’s a hidden regulatory tax that is so high,” Ms. Little says, “that I do think the companies will fight this.”

Lawsuits could also come from individual companies or industry associations, such as the National Association of Manufacturers, which has in the past challenged regulatory agencies, like the Environmental Protection Agency’s Clean Water Act. 

With less government regulation, Ms. Furchtgott-Roth says, companies can make better decisions without putting the pockets of American citizens at risk. “When a company makes a bad bet, it’s the company that pays, not the taxpayer,” she says. 

Heightened corporate costs could ultimately tilt investments away from productive to potentially unproductive goods, Ms. Furchtgott-Roth says. Consumers could be caught in the fray. Warning that government power tends to expand to its outer limits, she invokes the adage, “Don’t let the camel’s nose into the tent.”

The New York Sun

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