The Politics Behind the SEC’s New Climate Disclosure Rule—and What It Means for Investors

From our collaborating partner “Living on Earth,” public radio’s environmental news magazine, an interview by executive producer and host Steve Curwood with Pat Parenteau, an emeritus professor of law at Vermont Law and Graduate School. 

During the Great Depression, President Franklin Delano Roosevelt signed into law the Securities Exchange Act of 1934, to help safeguard U.S. financial markets against collapses like the Wall Street Crash of 1929.

That was decades before scientists alerted the world to the problem of climate disruption, which is creating new financial risks because of just how expensive it is; climate disasters now cost the U.S. around $100 billion every year. And adapting to sea level rise, extreme heat and hurricanes requires significant and costly upgrades to infrastructure and buildings. The climate emergency mandates a rapid shift towards cleaner energy, bringing new economic opportunities but also tanking the value of fossil fuel assets.

So the financial regulatory body that was created by FDR recently approved a rule that by 2026 will require public companies to inform investors about their greenhouse gas emissions and climate risks.

The three Democrats on the Securities and Exchange Commission all voted for the climate disclosure rule, while their two Republican colleagues voted against it. The fossil fuel industry immediately pushed back against the rule and filed several lawsuits with the help of conservative states, resulting in a temporary stay by the 5th Circuit Court of Appeals.

The opposition is part of a broader challenge by Republicans to the right of agencies to regulate environmental issues, from protecting fragile wetlands to setting air pollution standards.

Pat Parenteau, Emeritus Professor at Vermont Law and Graduate School, joined Living on Earth Host Steve Curwood to explain the SEC rule and the pushback. This interview has been edited for length and clarity. 

CURWOOD: Why is the Securities and Exchange Commission, the SEC, allowed to do this? It covers publicly traded companies, but what’s the rationale that they could regulate this?

PARENTEAU: The rationale is that they have to ensure that investors have accurate information about the value of the companies they’re investing in, and financial risks that companies are facing. Opponents of the rule are claiming it’s just climate policy or environmental policy. The SEC is saying no, it has to do with financial risks. The real question is going to be, is the SEC within the scope of its authority as given to it by Congress from the 1930s when the Securities and Exchange Commission Act was passed?

CURWOOD: So this will be settled in court? One would think that the SEC has the right to raise the question of these companies being viable going forward, given the climate emergency.

PARENTEAU: Well, that’s right. And it isn’t the first time that the SEC has addressed environmental issues generally, and the risks of pollution and liability for pollution. Oil spills, for example, can have major billion-dollar consequences. Nor is it the first time that the SEC has issued guidance on climate risks. But this is the first time they’ve actually adopted a rule that has the force of law with penalties for noncompliance. So it’s definitely a step up from where SEC has been before—but it’s not brand new.

CURWOOD: As this rule was getting put together, there were a number of things that were eliminated from the proposed rule. What was changed? And how does it compare to what’s going on in Europe and California? 

PARENTEAU: The proposed rule went all the way to require disclosure of emissions associated with the company’s supply chains and with their end use by consumers—that would be us: people who go to the gasoline station and pump the gas of Exxon and BP and Shell. It’s called Scope 3 emissions, and they comprise the largest percentage of emissions attributable to these companies. But they are extremely difficult to assess and quantify, because you’re talking about literally millions and millions of consumers using these products. So the SEC backed off from requiring disclosure of these so-called Scope 3 emissions. 

Companies are already subject to disclosure requirements that are more rigorous than what the SEC has proposed in California for companies doing business there—California being the fifth-largest economy in the world—and also companies doing business in Europe, where the European Union has imposed even more rigorous disclosure requirements. So in many ways, this is not new to these companies. They’re either doing it or they’re being required to do it in other contexts. 

The SEC did a couple of other things to water down the final rule. One, they increased the number of companies that are exempt from any disclosure requirements. Now, they’re just focused on the largest companies in the world that trade publicly. And they also gave companies the option of determining whether the risks from climate-related disasters are material to the individual companies. That introduces a sort of wild card into this equation when you have individual companies determining, “do we consider the risks to our business plan material enough to disclose to the public?”

CURWOOD: I think the analogy is giving the fox the keys to the henhouse.

PARENTEAU: Right—the foxes, making sure the chickens are all safe and secure! 

There is oversight. Once the determination is made that a company has acknowledged or been told by the SEC that it’s facing material risks, that calculation of the quantity of the emissions and the level of threat from the physical impacts of climate change have to be independently verified. That’s going to introduce yet another level of analysis for investors to protect them from investing in really risky assets, the danger of stranded assets. If companies don’t seriously start moving away from fossil fuels, a lot of the assets on their books are going to be stranded assets, and investors will be left holding the bag.

CURWOOD: Stranded assets such as an untapped oil field that they’ll never be able to use…

PARENTEAU: Yes.

CURWOOD: As soon as this rule was filed, lawsuits were also filed by industry. One of those lawsuits has advanced at the Fifth Circuit Court of Appeals, which has granted their motion to stay the rule. What is the practical effect of these lawsuits? And what do you think it says about the ultimate fate of this rule?

PARENTEAU: Lawsuits have been filed in six different U.S. Courts of Appeal. The Republican attorneys general from 13 different states have filed these cases. And the Fifth Circuit, which is the most conservative court in the country right now…you might argue that the Supreme Court itself is the most conservative, but certainly among the courts of appeals. 

The Fifth Circuit in New Orleans is pro industry—pro oil development, in particular; it did issue a stay on the SEC rule. It was a one-line order, no explanation. This stay by the Fifth Circuit will be in existence for a very short period of time. So its practical effect is limited. 

What happens now is there’s a special panel, which will draw lots from a lottery to determine which of these six circuit courts where these cases are pending will actually hear the case. Maybe it’ll be the Fifth Circuit, maybe it’ll be one of the other circuits. I don’t think the stay order says anything about whether the rule survives. (Editor’s note: After this interview was conducted, the Eighth Circuit Court of Appeals in St. Louis, Missouri was designated as the court to hear the challenges to the SEC rule.)

In addition to those challenging the rule as being outside of the SEC’s authority, there are also challenges from the environmental side saying the SEC erred by dropping the requirement for considering these so-called Scope 3 emissions. That case is pending in the D.C. Circuit Court of Appeals and also in the Second Circuit Court of Appeals. Both of those circuit courts have a majority of Democrat-appointed judges, whereas the other circuits have a majority of Republican appointed judges. You can see—even in the context of where this case is going to be heard, and who is going to hear it and decide it—that politics is playing a role in the ultimate fate of the rule itself.