A federal court has temporarily halted the Securities and Exchange Commission's climate-related disclosure rule in response to a lawsuit from a pair of fracking companies.
The SEC
However, even with the looser requirements, the rule has been facing an onslaught of lawsuits, including two lawsuits from groups of attorneys general in 19 Republican-led states, as well as a lawsuit from the Sierra Club, which doesn't believe the rule goes far enough. The lawsuit that resulted in a temporary halt came from two fracking companies, Liberty Energy and Nomad Proppant Services, which challenged the SEC's authority to regulate climate change. On Friday, a panel of judges in the Fifth Circuit Court of Appeals issued an emergency stay on the rule.
"The SEC tried to impose billions in compliance costs on America's publicly traded companies," said Devin Watkins, an attorney with the Competitive Enterprise Institute, in a statement Monday. "The commission did so to advance its own political agenda about one of the most hotly debated political topics today: the effects of climate change on our lives. This is, unambiguously, a major question that can only be decided by Congress. Companies are already required to disclose materially relevant information, which has never included such climate disclosures. Furthermore, the SEC lacks the authority to require disclosure of nonmaterial information. The court's suspension of this rule is a good development; it should never have been issued."
The SEC pointed out in response to the lawsuit that Liberty Energy was already disclosing climate-related risks as a publicly traded company. Indeed many public companies are already disclosing some of their climate risks in response to pressure from shareholders and because of recent requirements in California and the European Union.
"When the SEC first proposed this rule, it was very new at the time and they were out in front of a lot of these potential requirements," said Chris McClure, ESG services leader at Top 100 Firm Crowe LLP, in an interview after the rule was finalized but before the court issued the temporary stay. "At that time, people were very surprised, and the SEC has received a record number of comments. But there's a lot more awareness and education that's happened around reporting requirements in the U.S. and the EU that have outpaced what this rule requires in some ways. There are some nuances to this rule. There's a materiality assessment, but the overarching concepts of what you would be disclosing if it's material in terms of qualitative and quantitative aspects are now fairly well understood by most companies because they've been addressing these issues at some point over the last couple of years."
Whatever happens with the SEC climate disclosure rule, multinational companies are now dealing with the European Union's Corporate Sustainability Reporting Directive and California's new Climate Accountability Package. Accounting firms will still need to make sure clients are complying with any of the climate rules that remain in effect.
"Many of those large accelerated filers are also dealing with the European Union's CSRD rules and they're also focused on California, so this will be another rule that they'll have to focus on," said Kevin O'Connell, PwC's Trust Solutions sustainability leader, in an interview before the court's emergency stay. "The good news is all of those are based on the [Task Force on Climate-related Disclosures] framework. so they're starting from a good foundation. We're making sure the clients that we're talking to either understand or establish or refine their climate governance that they have. That will entail educating the board of directors or management or employees, and establishing the board oversight that will need to happen as it relates to this rule, and then understanding the current set of climate disclosures and information that they're making, and then trying to figure out how to identify gaps."
"Typically, we're seeing a lot of focus on getting complete and accurate data in order to make those disclosures," he continued. "That will require changes to processes, systems and internal controls in order to make sure that management is comfortable making those disclosures. In addition, they'll need to start to prepare for assurance. The transition period is a little longer than in the proposed rule, but make sure that those disclosures are auditable, and start to prepare for that."
