In March, the U.S. Securities and Exchange Commission adopted the Climate-Related Disclosure Rule despite facing legal challenges questioning their authority. Even under the previous legal standard, the SEC’s authority was uncertain, leading to a delay in implementation while the issue was resolved in court. However, with the new legal standard adopted by the Supreme Court in June, it is likely that the rule will be defeated. As the focus on climate change increased globally following the Paris Agreement, pressure mounted on businesses to be more accountable for their environmental policies, leading to the rise of environmental, social, and governance reports created by companies to showcase their green initiatives.
By 2020, the production of these reports had become common practice for both publicly traded and privately held companies, but there was no standardization in the content included. This lack of standardization posed challenges, particularly as environmental, social, and governance factors became crucial in financial reporting and investment strategies. Regulators rushed to create sustainability reporting standards, with the International Financial Reporting Standards Foundation’s Sustainability Disclosure Standards drawn up by the International Sustainability Standards Board in 2021. These standards were adopted as the global standard for sustainability and climate change reporting in June 2023, including requirements related to greenhouse gas emissions.
In March 2022, the SEC proposed the development of climate-related reporting standards, with the final rule requiring large publicly traded companies to disclose climate action, greenhouse gas emissions, and the financial impacts of severe weather events. Legal challenges soon followed, with five notable cases being filed against the SEC. Conservative states argued that the rule represented an overstep of authority, while the Sierra Club contended that it did not go far enough. Eventually, these cases will likely be combined and heard before the Supreme Court of the United States as one case.
The legal challenges against the SEC’s rule bring into question the separation of powers and the delegation of authority. Typically, the legislative branch creates laws, the executive branch implements them, and the judicial branch interprets them. However, Congress often delegates the details of legislation to administrative agencies, leading to questions about the extent of their authority. Recent Supreme Court decisions have indicated a move towards narrowing the agencies’ authority, particularly with the overturning of the Chevron deference in June. This places a significant burden on administrative agencies like the SEC to prove their authority in creating rules.
Given this legal landscape, it is likely that the Supreme Court will find the SEC to have overstepped its authority in adopting the Climate-Related Disclosure Rule. If climate-related disclosures or sustainability reports are to be mandated in the U.S., it will likely have to occur at the state level or through a congressional act. The implications of these legal developments will likely have far-reaching consequences for the regulation of environmental reporting and corporate accountability in the future. As climate change continues to be a pressing global issue, the role of regulatory bodies in ensuring transparency and accountability in business practices will remain a topic of debate and contention.