The U.S. Supreme Court’s ruling to constrain the Environmental Protection Agency on carbon emissions is creating uncertainty around the Securities and Exchange Commission’s climate disclosure proposals, a report from rating agency Sustainable Fitch says.
The Securities and Exchange Commission’s (SEC) proposals to mandate climate-risk disclosures by public companies went out for comment in March. The proposed rules would require comparable, structured disclosures on Form 10-K about a company’s governance, risk management and strategy with respect to climate-related risks.
However, the fate of those proposals may be in question, Fitch said, following the U.S. Supreme Court’s 6-3 ruling against the Environmental Protection Agency’s (EPA) ability to limit emissions.
According to the Fitch report, the main issue in the EPA decision was the “major question doctrine,” which holds that federal agencies need explicit direction from Congress before setting regulations that have significant political and economic implications.
Fitch said the doctrine has been invoked only in “extraordinary cases,” as courts tend to defer to agencies’ expertise. However, the SEC disclosures could be one of those cases, it said.
“As the SEC’s proposed climate disclosure rules are far-reaching — they would apply to all publicly listed companies and require detailed disclosure of emissions data and climate-related financial risks (from 2024 for large companies), increasing compliance costs and potentially affecting asset values and companies’ risk profiles — it is feasible that the court would view the matter in terms of the major question doctrine,” the report said.
The SEC’s proposed rules haven’t been challenged at the Supreme Court, but Fitch noted that several state attorneys have said they intend to launch legal challenges.
Fitch noted the SEC rules only require companies to supply information, a more limited mandate than the EPA’s Clean Power Plan. The limited mandate may make the use of the major question doctrine less likely, the report said.
“The SEC was careful to root its proposed rules in its enabling legislation — the Securities Act of 1933 and the Securities Exchanges Act of 1934 — basing the disclosure requirements on financially material information needed by investors to make decisions and manage risk,” Fitch said.
A “key test” in any legal challenge will be whether courts view the disclosures as financially material, it said.