In my recent wrap-up of the top D&O stories of 2023, I noted that one of the key developments during the past year was California’s adoption of new climate change disclosure requirements, which were enacted at a time when there was the added prospect that the SEC would finally release its own climate change disclosure guidelines by April 2024. While the California requirements have not yet been implemented and the final SEC disclosure guidelines have not yet even been released, there are growing signs that these climate change-related disclosure requirements may face significant hurdles and challenges.

It is not news that the SEC disclosure guidelines, whenever they are finally released, likely will face significant legal challenges, as I have previously noted on this site (here). However, this past week, in a Congressional hearing before a House Financial Services subcommittee, as reported in a January 18, 2024, Law360 article (here), spokespersons for conservative and business interests reiterated their belief that the SEC’s climate change disclosure guidelines, as proposed, reflect “several deficiencies,” and likely will face significant legal challenges.

The Congressional Hearings

Representatives of trade groups such as the National Association of Manufacturers and others in statements at the committee hearing complained about the costs for companies of putting the proposed disclosure requirements into effect. The representatives particularly targeted the proposed rules’ requirements of disclosure of so-called Scope 3 emissions information, having to do with greenhouse gas emissions of reporting companies’ suppliers and customers. The representatives emphasized that many of the companies upon whom reporting companies will have to rely to be able to compile this type of information are private companies without the resources to be able to respond to information requirements of the kind required.

The unmistakable message from the Congressional hearings is that there are groups intending to file legal challenges to the SEC’s disclosure guidelines, whenever they eventually are released, and the groups are already lining up and preparing for the fight. (The obvious purpose of the hearing was to deliver a message to the SEC as it prepares to finalize the disclosure guidelines.)

The Likely Legal Challenges to the SEC’s Final Climate Change Disclosure Guidelines

As I noted above, it is not news that the SEC’s climate change disclosure guidelines, whenever they are finally released, will face legal challenge. The final rules will almost certainly face a challenge based on the “major question principle,” which has been elaborated upon in two recent U.S. Supreme Court rulings.

First, in its June 30, 2022, opinion written by Chief Justice John Roberts in West Virginia v. EPA (here), the Court struck down Environmental Protection Agency rules on the grounds that the agency had exceeded its authority when it promulgated the Clean Power Plan, which provided requirements for utilities to reduce carbon pollution from their power plants. In striking down the rules, the Court relied on “the major questions” principle, which holds that in “extraordinary cases” involving matters of “great economic and political significance,” federal agencies must rely on specific Congressional authorization for their actions. Courts, the Supreme Court said, should be “skeptical” of agencies’ assertions that they have broad policy-making authority.

More recently, the Court relied on the “major questions principle” to strike down U.S. Department of Education rules providing for forgiveness of certain student loans. In its June 30, 2023, decision in Biden v. Nebraska (here), the Court held that the Education Department’s authority under the HEROES Act to “waive or modify” regulations governing student-loan programs did not give the agency the authority to “transform” student loan requirements. In examining the question of the agency’s authority, Justice Roberts, again writing the opinion for the majority, invoked the “major questions” doctrine to note that if Congress wants to give an administrative agency the power to make decisions of vast economic or political significance, it must say so clearly. In the student loan case, Justice Roberts said, the HEROES Act did not authorize the debt-relief program at all, much less clearly.

In these two cases, the Supreme Court has shown its willingness to entertain challenges to federal agencies’ rule-making authority. Perhaps of even greater potential significance are two cases currently pending before the Court and argued just last week in which the Court will have occasion to re-consider so-called Chevron deference. Under the Chevron doctrine, courts must accept an administrative agency’s interpretation of its rule-making authority unless the interpretation is arbitrary or manifestly contrary to the statute.

As discussed in detail in a January 18, 2024 post on the Cooley law firm’s PubCo blog (here), in two companion cases, Loper Bright Enterprise v. Raimondo and Relentless, Inc. v. Department of Commerce, the Court is considering whether the National Maritime Fisheries Services (NMFS) has the authority to require Atlantic herring fishing vessels to pay the costs for onboard federal observers who are required to monitor regulatory compliance.

These cases about Atlantic herring fisheries may seem a long way from the likely upcoming battle over the SEC’s requirements for climate change-related disclosures. However, both cases involve questions of the administrative agencies’ rule-making authority.

The question whether the NMFS can require herring fishers to have on board and pay for federal monitors, just like the question whether the SEC can require reporting companies to make climate change disclosures, turn on questions of the agencies’ statutory rule-making authority. In both instances, the agencies themselves have determined that they have the authority to promulgate the challenged rules.

Under the Chevron doctrine, courts defer to these kinds of agency statutory interpretations. However, if the U.S. Supreme Court in the Atlantic fisheries cases were to strike down Chevron deference, neither the NMFS nor the SEC would be entitled to deference on their interpretation to their statutory authority. Thus, the two Atlantic fisheries cases, which will be decided before the end of the U.S. Supreme Court’s current term in late June 2024, could have important implication for likely future challenges to the SEC’s eventual final climate change disclosure guidelines.

Were the Court to strike down Chevron deference in the two pending Atlantic fisheries cases, those challenging the SEC’s authority to issue the climate change disclosure guidelines, in arguing that the SEC exceeded its authority in issuing the guidelines, would contend that the Court is not required to defer to agency’s own interpretation of its statutory authority, but rather could determine based on its own reading of the statutory language, whether the guidelines were within the agency’s authority.

All of which is a long way of saying that the prospective challengers to the SEC’s eventual final climate change-related disclosure guidelines will have extensive arguments on which the challenge the rules – and depending on the outcome of the Atlantic fisheries cases, could have even further grounds on which to try to bolster their arguments.

The California Climate Change Disclosure Laws

There are of course the climate change disclosure statutes that California Governor Gavin Newsome signed into law last October. As I noted at the time (here), the California guidelines potentially reach even further than the proposed SEC climate change disclosure guidelines, as they apply to both public and private companies. The California legislation expressly requires Scope 3 disclosures. And they do not apply just to companies based in California, but rather apply to companies “doing business’ in California. The California statutes could require extensive climate change-related disclosures for many companies even if the SEC guidelines face legal challenges.

Of course, the California laws could face their own legal challenges. Among other things, challengers may question what exactly “doing business” may mean for purposes of the statutes.

In addition, the statutes are already facing more practical challenges – the fact is, there may not be enough money in the California budget to implement the new laws.

As discussed in a January 17, 2024, post on the Jim Hamilton’s World of Securities Regulation blog entitled “Could Implementation of California’s Twin Climate Laws Be in Jeopardy?” (here), due to a projected 2024 California budget shortfall (estimated to be nearly $38 billion), the California Governor’s recent budget proposes pausing funding to implement newly signed laws, including the climate change disclosure statutes. According to statements issued by the bills’ sponsors, the Governor’s proposed budget plans could “jeopardize implementation” of the climate bills. To be sure, these issues could get sorted out at the budget process plays out over the next few months. However, the California bills, for all of their potential impact, are currently not on a trajectory to get off of the ground.

The EU’s Climate Change Disclosure Requirements

It remains to be seen how all of these challenges and prospective hurdles will play out. In the meantime, while the SEC and California climate change disclosure initiatives both await further developments, the process surrounding the European Union’s climate change disclosure requirements is going forward. As I discussed at the time when the EU requirements were put in place in July 2023, the requirements apply not only to companies based in the EU, but they eventually will apply to companies based outside the EU conducting certain specified levels of business in the EU, as well as to companies with operating subsidiaries in the EU. Many companies, including many companies not based on the EU, will eventually be required to comply with the EU disclosure requirements, which in many ways go well beyond the SEC’s proposed disclosure requirements.

There is clearly a lot more of this story to be told in the months and even years ahead. But it does seem that, notwithstanding the various challenges and hurdles that the SEC and California disclosure requirements may face, one way or the other many companies will find themselves subject to climate change disclosure requirement of some kind.