On March 6, 2024, the Securities and Exchange Commission (SEC) voted 3-2 to adopt final rules requiring registrants to disclose climate-related information in their registration statements and period reports (the Rules), two years after initially being proposed.[1] This final version significantly pares down some of the most controversial aspects of the new regulations. Nonetheless, states, companies and industry groups acted quickly to challenge the Rules, filing suit in courts of appeals across the country.

The Fifth Circuit was the first to act, granting an administrative stay and pressing pause on implementation of the new Rules.[2] Given the numerous cases filed nationwide, however, the challenges to the new Rules were consolidated before the Eighth Circuit on March 21, 2024, which will now be tasked with determining their legality.[3]

The litigation will be an important litmus test for the federal judiciary’s tolerance of novel agency action regarding climate regulation. Challengers of the Rules hope that the case will present another victory following the Supreme Court’s 2022 decision in West Virginia v. EPA. In this landmark ruling, the court concluded that the EPA lacked authority to compel states to shift electricity generation from coal power plants to lower carbon emission sources, such as natural gas plants or wind farms.[4]

Yet given the uncertainty of the Eighth Circuit’s ultimate decision, registrants will now need to decide whether to begin the work to prepare for compliance under the new Rules. For many, this work has already begun. Companies have responded to investor demands and other regulatory requirements by voluntarily including climate-based disclosures in their SEC filings. Still, the litigation will have important implications for SEC registrants, and for the broader powers of federal agencies to issue new climate-based regulations.

Key Changes in the New SEC Rules

The SEC’s recent vote to approve the Rules followed more than two years of debate after a preliminary version was first introduced in March 2022.[5] SEC Chair Gary Gensler announced then that the proposed Rules “would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”[6]

Industry groups disagreed. For instance, the Chamber of Commerce’s comment countered that the proposed Rules “do not strike the right balance and may, in fact, prove counterproductive by mandating that companies produce extensive amounts of information that is not material, thus obscuring for investors what is most important.”[7] The Chamber of Commerce was not alone in its criticism. The proposed Rule prompted more than 24,000 comments during the notice and comment period from a diverse assortment of states, companies, industry groups, academics, and private individuals.[8]

Now, the final Rules contain substantial additional disclosure requirements for registrants. Among other things, the Rules require registrants to disclose:

• Climate-related risks that materially impact the “strategy” and “outlook” of the registrant;[9]

• The impacts of those climate-related risks on the registrant’s business model and financial outlook, including regarding any mitigation activities and transition plans to manage material risk;[10]

• For large accelerated filers and accelerated filers,[11] greenhouse gas emissions metrics regarding the registrant’s direct emissions from operations the registrant controls (referred to as “Scope 1 emissions”), and emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by the registrant’s operations (referred to as “Scope 2 emissions”). These registrants will only be required to disclose these metrics if the emissions are “material”;[12]

• Governance disclosures regarding board oversight and management oversight regarding climate-related risk;[13] and

• Financial statement disclosures regarding the impact of severe weather events and other climate conditions, and a description of how the registrant’s financial methodology was materially impacted by severe weather events and other climate conditions.

Notably, the SEC added a materiality qualifier for disclosures related to greenhouse gas emissions, meaning registrants will only have to disclose greenhouse gas emissions metrics to the extent such disclosure is “material” to the registrant’s business. On one hand, this will empower companies to make their own determinations. On the other, it will also force registrants to undertake the work to analyze what is, and what is not, material.

The SEC also reduced the reporting requirements for smaller registrants, including those designated as smaller reporting companies (SRCs) and emerging growth companies (ECGs).

Finally, the Rules include a safe harbor for private securities litigation arising out of climate-related disclosures. Apart from statements of historical fact and greenhouse gas emissions disclosures, the Rules extend the protections of the Private Securities Litigation Reform Act (PSLRA) for other disclosures mandated by the change.

The Rules’ Road to the Eighth Circuit

Immediately after the Rules were adopted by the SEC, many entities nationwide sought to enjoin enforcement of the law.[14] In total, 25 states have signed onto petitions for review to block the Rules, arguing that the regulations are an overstep of SEC authority.[15] Environmental groups have taken the opposite position. They have filed petitions for review based on the theory that the SEC arbitrarily reduced the scope of the regulations in the final Rules, and that the new disclosure regime does not go far enough.[16]

The Fifth Circuit was the first court to take action. On March 8, 2024, Liberty Energy Inc. (an oilfield services firm) and Nomad Proppant Services LLC (an affiliated service-based frac sand company) filed an emergency motion for administrative stay, based on three points of argument.[17]

The petitioners first argued that the Rules violates the “major questions doctrine” by purporting to “resolve one of today’s most hotly debated political issues … [with] significant consequences on registrants, including an estimated $4.1 billion in annual compliance costs.” Despite these major impacts, the Rules “derive authority from an old statute employed in a novel manner,” meaning they are not supported by the SEC’s congressional authority.[18]

Second, they argued that the Rules are “arbitrary and capricious.” They represent a dramatic change from the SEC’s prior position that it could not issue climate-based regulations and are predicated on evidentiary support that is “at-best mixed.”[19]

Finally, they argued that the Rule violated the First Amendment by “mandating controversial disclosures using controversial frameworks and effectively mandating discussions about climate change.”[20]

Without a stay, the petitioners contended that they would suffer irreparable harm due to the nonrecoverable compliance costs required to create the necessary internal control and disclosure systems. In response, the SEC argued that none of the harms articulated by the petitioners were sufficiently imminent to justify immediate relief. Furthermore, the SEC noted that the Rules have not yet been formally published, and in any case, the registrants will not be required to make any disclosures under the Rule until Q1 2026.[21] Additionally, the petitioners were unlikely to succeed on the merits, as the required climate-related disclosures are authorized by federal securities law and in line with “longstanding interpretations of the [SEC’s] authority.”[22]

The Fifth Circuit sided with the petitioners. On March 15, 2024, the court granted an administrative stay of the Rules.

While the Fifth Circuit’s opinion temporarily pumped the brakes, the scope of nationwide litigation remained. The Judicial Panel on Multidistrict Litigation acted to consolidate all cases before a single court of appeals, selected by random draw. On March 21, 2024, the Eighth Circuit was selected to hear the consolidated cases. The next day, the Fifth Circuit dissolved its administrative stay and transferred the litigation to the Eighth Circuit.[23]

Litigation across all of the cases will now proceed in the Eighth Circuit, which will first need to decide whether to order an administrative stay of the new Rule pending final resolution of the cases. Liberty Energy Inc. and Nomad Proppant Services LLC have already filed a letter with the Eighth Circuit requesting the court to grant its emergency stay motion originally filed in the Fifth Circuit.[24] The SEC filed its response on April 1, 2024.[25]

Guidance for Registrants

As the litigation proceeds, the case will have important consequences for the regulatory power of federal agencies and the ultimate disclosure requirements for registrants.

1. First, the case will test the limits of the major questions doctrine. While agencies are generally given significant deference by federal courts, the Supreme Court has previously suggested that there may be an exception for agency decisions of “vast economic and political significan[ce].”[26]

In 2022, the Supreme Court fully embraced this so-called “major questions doctrine” in West Virginia v. Environmental Protection Agency.[27] In that case, the court held that the Environmental Protection Agency (EPA) lacked authority to issue a greenhouse gas emissions rule that shifted electricity generation away from coal, towards other forms of electrical generation with lower emissions. The court explained that the EPA’s actions exceeded the agency’s congressional mandate, as the regulations at issue were a “transformative” change in its authority. Absent any new legislation or Congressional approval of the agency’s actions, the agency’s authority could not support the new regulations.

Here, the SEC’s challengers hope that the Eighth Circuit, and potentially the Supreme Court, will adopt a similar argument to strike down the new Rules. If successful, the major questions doctrine will again prove to be a robust tool for litigants challenging perceived agency overreach, particularly in the environmental space.

2. Second, while the challenges are pending, companies impacted by the new Rules will need to look ahead. Although the first disclosures required by the Rules are not due until Q1 2026, companies will likely need to start preparing now in order to comply. Liberty Energy Inc. estimates in its brief that annual compliance costs associated could be on par with its compliance costs required by the Sarbanes-Oxley Act, totaling as much as $1 million per year (and even higher for larger registrants). Despite these costs, given the uncertainty of ongoing litigation, companies should likely reasonably prepare for compliance until there is a definitive ruling from the Eighth Circuit.

3. Third, despite the major fight over the new Rules, the impact of the case’s resolution may not be as dramatic as it seems, at least for some registrants. Already, investors are increasingly demanding additional climate-related disclosures from companies. The SEC reported in its announcement that 60% of Russell 3000 companies and 90% of Russell 1000 companies already provide some form of climate-related information in SEC filings, with 60% of Russell 100 companies already disclosing Scopes 1 and 2 greenhouse gasses.[28] Additionally, certain companies may already be required to disclose similar information due to mandatory international or state reporting regimes.[29] Nonetheless, if upheld, the new Rules will undoubtedly change the nature of registrants’ reporting requirements.

[1] https://www.sec.gov/news/press-release/2024-31.

[2] See Liberty Energy, Inc., Nomad Proppant Services, L.L.C., v. Securities and Exchange Commission, No. 24-60109, Unpublished Order Granting Motion For An Administrative Stay, (5th Cir. Mar. 13, 2024).

[3] See In Re: Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, Issued on March 6, 2024, J.P.M.L., MCP No. 180.

[4] See West Virginia v. Environmental Protection Agency, 142 S.Ct. 2587, 2614-16 (2022).

[5] https://www.sec.gov/news/press-release/2022-46.

[6] https://www.sec.gov/news/press-release/2022-46.

[7] https://www.sec.gov/comments/s7-10-22/s71022-20131892-302347.pdf.

[8] https://www.sec.gov/comments/s7-10-22/s71022.htm.

[9] Item 1502(a) of Regulation S-K.

[10] Item 1502(c) of Regulation S-K.

[11] These two categories of registrants generally include companies with a public float of $250 million or higher.

[12] Item 1505 of Regulation S-K.

[13] 1501 of Regulation S-K.

[14] See, e.g., Texas Alliance of Energy Producers, et al. v. SEC, No. 24-60109 (5th Cir. 2024); Chamber of Commerce of the United States of America, et al. v. SEC, No. 24-60109 (5th Cir. 2024).

[15] See State of Louisiana, et al. v. SEC, No. 24-60109 (5th Cir. 2024); State of Iowa et al. v. SEC, No. 24-1522 (8th Cir. 2024); State of West Virginia, et al., No. 24-10679 (11th Cir. 2024).

[16] For instance, both the National Resource Defense Council and the Sierra Club filed Petitions for Review following the SEC’s adoption of the final Rules. See National Resources Defense Council, Inc. v. SEC, 24-707, Petition for Review (2nd Cir. Mar. 12, 2024); Sierra Club and Sierra Club Foundation v. SEC, 24-1067, Petition for Review (D.C. Cir. Mar. 13, 2024).

[17] See Liberty Energy Inc., Nomad Proppant Services LLC, v. SEC, 24-60109, Emergency Motion For Administrative Stay And Stay Pending Judicial Review, at 7-12 (5th Cir. Mar. 8, 2024).

[18] Id.

[19] Id. at 22.

[20] Id. at 24-27.

[21] See Liberty Energy Inc., Nomad Proppant Services LLC, v. SEC, 24-60109SEC’s Opposition To Petitioner’s Motion For Administrative Stay And Stay Pending Judicial Review, at 7-12 (5th Cir. Mar. 13, 2024).

[22] Id. at 9.

[23] See Liberty Energy, Inc., Nomad Proppant Services, L.L.C., v. Securities and Exchange Commission, No. 24-60109, Unpublished Order, Dkt. No. 87-1 (5th Cir. Mar. 22, 2024).

[24] See Liberty Energy, Inc., Nomad Proppant Services, L.L.C., v. Securities and Exchange Commission, No. 24-1624, Dtk. No. 5377822 (8th Cir. Mar. 27, 2024).

[25] See Liberty Energy, Inc., Nomad Proppant Services, L.L.C., v. Securities and Exchange Commission, No. 24-1624, Dtk. No. 5379427 (8th Cir. Apr. 1, 2024).

[26] Utility Air Regulatory Group v. EPA, 573 U.S. 302, 324 (2014).

[27] West Virginia v. EPA, 597 U.S. 697 (2022).

[28] https://www.sec.gov/news/statement/lizarraga-statement-mandatory-climate-risk-disclosures-030624#:~:text=Investor%20demand%20for%20climate%20risk,of%20climate%2Drelated%20information%3B%20and.

[29] For instance, these mandatory regimes include the European Union’s Corporate Sustainability Reporting Directive (CSRD), and the State of California’s Senate Bills 261 and 531.