West Virginia v. EPA Casts a Shadow Over SEC’s Proposed Climate-Related Disclosure Rule

The U.S. Supreme Court’s 6-3 decision in West Virginia v. EPA may call into question whether the U.S. Securities and Exchange Commission (“SEC”) has the legal authority to adopt and enforce its proposed climate-related disclosure rule. In its June 30, 2022 ruling, the Court limited the Environmental Protection Agency’s (“EPA”) ability to regulate greenhouse gas emissions from power plants by holding that Section 111(d) of the Clean Air Act did not authorize the EPA to devise emissions caps based on the generation shifting approach used in the Clean Power Plan.

The Court’s opinion relied on the “major questions doctrine,” which provides that in certain “extraordinary cases,” administrative agencies must have “clear congressional authorization” to make decisions of vast “economic and political significance.” Though the Court did not outline a specific test for what constitutes an “extraordinary case,” it discussed factors such as whether an agency is relying on ambiguous statutory text to claim a significant expansion of power and whether the agency lacks expertise in the subject matter. In doing so, the Court’s decision could provide a legal basis for challenges to other economically and politically significant regulatory efforts, such as the SEC’s proposed climate-related disclosure rule.

The opinion also provided a broad interpretation of legal standing to bring a claim against an administrative agency by finding that the petitioners had standing despite the EPA’s stated intention not to enforce the Clean Power Plan and instead engage in new rulemaking. This broad interpretation of standing potentially increases the scope of challenges that could be brought against administrative agencies, such as the SEC, as petitioners may be deemed to have standing to challenge proposed rules, or those that have been denounced or unenforced.

Proposed climate-related disclosure rule and the SEC’s asserted statutory authority

On March 21, 2022, the SEC unveiled its proposed climate-related disclosure rule in its stated effort to provide investors with “consistent, comparable and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” The rule would require issuers to include certain climate-related disclosure in their registration statements and periodic reports, including: climate-related risks and their actual or likely material impacts on the issuer’s business, strategy, and outlook; governance of climate-related risks and relevant risk management processes; greenhouse gas emissions; climate-related financial statement metrics and related disclosures; and climate-related targets and goals.

The SEC asserted that it has the statutory authority to promulgate such disclosure requirements pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. These statutes grant the SEC the authority to compel disclosures that are “necessary or appropriate in the public interest or for the protection of investors.” The SEC contended that climate disclosures are necessary because “climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.” In support of this contention, the SEC cited to the Report on Climate-Related Financial Risk 2021 published by the Financial Stability Oversight Council, which details how climate-related risks pose financial threats at the firm and financial system levels.

Public comment period and related backlash

By the end of the extended three-month public comment period on June 17, 2022, the SEC had received more than 5,000 letters from public companies, law firms, lawmakers, law professors, and others in support of or criticizing the proposed rule, including on the basis that it exceeds the scope of the SEC’s statutory authority. Critics of the proposed rule also argued that the rule poses higher costs, greater legal liability, and excessive reporting burdens on issuers. Many disapproved of the lack of clarity the SEC provided in determining what is considered “material” to shareholders and highlighted issues concerning the extent of Scope 3 emissions disclosure requirements.

The potential far-reaching effects of West Virginia v. EPA on the SEC and other administrative agencies

The Court’s ruling may complicate the finalization, enactment and enforcement of the SEC’s proposed rule, which is contemplated to be adopted later this year. If the SEC’s proposed rule is adopted in its current or similar form, critics may challenge it under the major questions doctrine by citing the Supreme Court’s reasoning in West Virginia v. EPA, and, in doing so, arguing that the SEC is relying on ambiguous statutory text to claim a significant expansion of power in a subject matter in which it lacks expertise.

Some have argued that the SEC’s statutory authority is “relatively clear,” and draw a distinction between the EPA’s direct regulation of emissions from coal plants and the SEC’s efforts to enhance disclosure. A former SEC attorney speculated that, if a claim is brought, the SEC could argue that the applicable court rely on the “Chevron doctrine” rather than the major questions doctrine. The Chevron doctrine requires courts to accept an agency’s interpretation of an ambiguous law if it is “rational” and “reasonable.” Notably, there is no discussion of the Chevron doctrine in the Court’s opinion in West Virginia v. EPA; however, the dissent noted that courts can “circumvent a Chevron deference analysis altogether” by interpreting a statute as negating an agency’s claimed authority.

Key takeaways

The West Virginia v. EPA decision provides a powerful tool for litigants to challenge rules of administrative agencies, such as the SEC. Whether it will encourage or force the SEC to amend its proposed climate-related disclosure rule remains unknown.