Dive Brief:

• The Securities and Exchange Commission voted to cease defending its climate-risk disclosure rule in court, the agency said in a Thursday afternoon press release. 
• After first seeking a delay in arguments for lawsuits challenging the rule last month, the SEC told the Eighth Circuit Court of Appeals — where challenges to the rule are consolidated — that the agency would withdraw its defense of the rule in a March 27 letter. The SEC said its lawyers were “no longer authorized to advance” arguments the agency had made to defend the rule under the previous administration.
• While the decision was lauded by a trio of Republicans on the House Financial Services Committee, sustainable investing experts called the move dangerous. One SEC commissioner said the current Commission is looking to “unlawfully” dismantle the climate disclosure rule.

Dive Insight:

The move, which further differentiates the agency from its Biden-era approach, comes as little surprise. Experts previously told ESG Dive that the SEC did not appear inclined to defend the rule, after Acting SEC Chair Mark Uyeda asked the Eighth Circuit to delay arguments last month. 

In his Feb. 11 statement, Uyeda said he “continue[s] to question the statutory authority of the Commission to adopt the Rule, the need for the Rule, and the evaluation of costs and benefits.”

The SEC approved its climate-risk disclosure rule last March, nearly two years after it was first proposed and with significant revisions. The final rule removed a proposed requirement for public companies to disclose their scope 3 emissions and required a more limited universe of companies to disclose scope 1 and 2 emissions, among other changes. The agency stayed the rule in April following lawsuits challenging the rule.

At the time of its passing and in the weeks that followed, Uyeda debated the agency’s authority to promulgate the rule and said the rule requires information not financially material to investors. 

Under former Chair Gary Gensler, the SEC had defended the rule against claims it was arbitrary and capricious, beyond the agency’s statutory authority, unconstitutional and in violation of the First Amendment in a 25,000-word August reply brief. 

The agency’s acting chair said Thursday’s actions represent the SEC looking to cease its involvement “in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”

The SEC’s decision to abandon its defense of the rule was applauded by a trio of Republicans on the House Financial Services Committee: Chair French Hill of Arkansas, Capital Markets Subcommittee Chair Ann Wagner of Missouri and Committee Vice Chair Bill Huizenga of Michigan. The lawmakers called the decision a “turning point” and “a welcome and long-overdue recognition … [that] this rule was a gross overreach of the SEC’s statutory authority” in a Thursday afternoon press release.

“The Commission, under former Chair Gensler, pursued a radical climate agenda that stretches the law and imposes significant costs on public companies and investors,” the GOP members said. “This reversal is a victory for common sense, American businesses, and the rule of law.”

However, SEC Commissioner Caroline Crenshaw, a Democrat, said the agency’s attempt to “dismantle” the climate-risk disclosure rule comes “by way of politics” and called it an attempt to “unlawfully” circumvent the Administrative Procedure Act, which governs how agencies promulgate, revise and issue recissions for regulations, in a statement following the vote. 

Crenshaw said the agency’s actions are “inconsistent with the APA, historical practice and they embody bad governance.” She argued that the agency should either defend the existing rule being litigated or ask the courts to stay the litigation while it prepares a rule “it is prepared to defend” though a rescission or other action in line with the APA.

“By [the Commission's] letter, we are apparently letting the Climate-Related Disclosures Rule stand but are withdrawing from its defense in court,” Crenshaw said. “This leaves other parties, including the court, in a strange and perhaps untenable situation. In effect, the majority of the Commission is crossing their fingers and rooting for the demise of this rule, while they eat popcorn on the sidelines. The court should not take the bait.”

Crenshaw said the agency’s arguments supporting the rule in litigation remain sound, with no changes in statutory authority, new judicial precedent or “any change in the vigorous demand by the investing public.”

Several experts believe the SEC’s posture change will hurt the investing community and signals a retreat from the agency’s mandate to protect investors. The action is “clearly a step backward in helping investors and other market participants” get necessary information on companies’ climate-related financial risks, according to Steven Rothstein, managing director of the sustainable capital markets accelerator at environmental nonprofit Ceres.

“The SEC was established to protect investors, and for more than 20 years, investors have clearly and overwhelmingly stated that they need more clear, consistent, and decision-useful information on companies’ exposure to climate-related financial risks,” Rothstein said in a press release.

Dennis Kelleher, president and CEO at nonpartisan financial advocacy nonprofit Better Markets, said that without the SEC’s climate-risk disclosure rule capital markets are left with incomplete information to make fully informed decisions about how to properly price company stocks and allocate capital. 

“When the total mix of information is incomplete, then investors cannot make fully informed decisions, stocks are mispriced, and capital is misallocated,” Kelleher said in emailed comments Thursday. “That’s what’s at stake when the SEC fails to put investors first and instead lets management and corporate America decide what information investors receive, which is what happened today.”

In communicating the withdrawal of the agency’s defense, the SEC said it had yielded any oral argument time to the court or other parties the court may determine. There are 18 states and the District of Columbia signed on as intervenors in the case that could decide to continue the rule’s defense in the agency’s absence, Stephen O’Day, a partner at Smith, Gambrell & Russell, previously told ESG Dive.

The SEC’s decision to halt its defense of the climate disclosure rule came the same day former commissioner Paul Atkins — President Donald Trump’s nominee to replace Gensler as SEC Chair — faced a Senate Banking Committee hearing on his nomination.