RPublic officials and corporate lobby groups are launching a multi-pronged legal attack on the Biden administration’s efforts to help investors hold public companies accountable for their carbon emissions and other climate change risks.
The U.S. Securities and Exchange Commission (SEC) in March proposed new climate disclosure rules that would require public companies to report climate-related impact and risks to their operations.
The regulator has since received more than 14,500 comments. Submissions from 24 Republican state attorneys general and some of the nation’s most powerful industry associations suggest those groups are preparing a series of legal challenges after the settlement is finalized, which could be as soon as next month.
“I would expect a legal challenge to be filed immediately once the final rule is released,” Jill E Fisch, professor of business law at the University of Pennsylvania, told The Guardian. “They’ve probably already written up their complaints and they’re ready to file.”
Some opponents say forcing companies to publish climate-related information undermines their right to free speech. Others (often the same ones) say the rule goes beyond the legal authority of the SEC.
Both critics feature prominently in comments from Republican attorneys general and the U.S. Chamber of Commerce, which spent more than $35 million lobbying the federal government in the first half of 2022, according to OpenSecrets. The Republican letter warns that if the new disclosure requirements are finalized, “capitalism will go down the drain.”
The SEC’s proposal does not establish environmental policy or require companies to take climate-related actions other than making more information publicly available.
Objections to free speech and legal authority have been met with deep skepticism from legal experts and former SEC officials.
In a letter to the commission, John Coates, a professor at Harvard Law School and former general counsel for the SEC, said that instead of challenging the climate disclosure rule on its merits, “critics have resorted to poor interpretation of the proposition and to the invention of their own fictitious rule.”
In another letter, a bipartisan group of former SEC officials, jurists, securities law experts and corporate attorneys noted that “the SEC has required environmental disclosure at least as far as the Nixon administration. While not all of the letter writers support the substance of the regulations, they agreed without exception “that there is no legal basis to doubt the commission’s authority to compel public company disclosures. related to the climate”.
“The SEC promulgates a disclosure rule that is square in its wheelhouse,” said Fisch, of the University of Pennsylvania. “That’s exactly what Congress told him to do, and what he’s done consistently since 1933.”
But charges of legal authority and free speech, tenuous as they are, aren’t the only grounds that opponents of the climate disclosure rule have hinted at litigation.
In a recent analysis, the Guardian revealed how the Business Roundtable, a lobby group for the CEOs of America’s biggest companies, opposes a key provision of the SEC’s proposal that would require some large companies to measure and report the emissions generated throughout their supply chains – known as Scope 3 emissions.
In addition to challenging the substance of the rule, the Business Roundtable also rejects the SEC’s estimate of how much it would cost companies to comply. (The organization said in an email that its comments “[are] focused on identifying the challenges in the proposed rule in hopes that the SEC will address them”.)
The SEC projects that companies will face compliance costs of $490,000 to $640,000 in the first year of climate reporting, and less in subsequent years. (By comparison, a 2019 study predicted that climate change could cost businesses around $1 billion over the next five years.)
A detailed assessment by Shivaram Rajgopal, professor of accounting and auditing at Columbia Business School, concluded that even without considering any benefits of the climate disclosure rule, the costs would be negligible for most companies. “The loss in market capitalization, if any, due to compliance costs is probably too small for an outsider to detect and separate from daily volatility in stock returns for unrelated reasons,” Rajgopal wrote.
Last quarter, ExxonMobil made nearly $18 billion in profit, the largest quarterly profit in the company’s history. During the same period, General Motors generated more than $35 billion in revenue, while Walmart reported revenue of nearly $153 billion. The Economist recently reported that after-tax corporate profits as a share of the US economy have reached their highest level since the 1940s.
ExxonMobil, GM and Walmart are members of the American Chamber of Commerce and the Business Roundtable. According to a report by the nonprofit Center for Political Accountability, during the 2020 election cycle, each company donated at least $125,000 to the Republican Attorneys General Association, which supports political campaigns and legal programs in GOP attorneys general across the country.
In their letter to the SEC, 24 of those attorneys general called the commission’s cost-benefit analysis “woefully unfinished” and warned that finalizing climate disclosure rules “will undoubtedly lead to legal challenges.” .
The Business Roundtable, meanwhile, described the analysis as “fundamentally flawed” and said its member companies “believe [the costs of the rule] will be orders of magnitude larger than the SEC estimates.” The chamber issued a similar condemnation, writing in its voluminous brief that “the SEC’s economic analysis…is incomplete and significantly underestimates compliance costs.”
Asked to comment, neither organization specifically responded to questions about whether it plans to take legal action against the SEC if the final rule is not significantly changed.
One might expect trade associations to instinctively oppose new regulations, but in the past such statements have proven to be more than just political rhetoric. On several occasions in response to past regulations, the Chamber and the Business Roundtable have successfully sued the SEC over profitability concerns.
In 2011, following a lawsuit filed by the two groups, the DC Circuit struck down an SEC rule that would have made it easier for shareholders to consider new board members of public companies, ruling the “arbitrary and capricious” rule. The ruling in Business Roundtable v SEC said the commission “neglected its legal obligation to assess the economic consequences of its rule”, citing, among other figures, a cost estimate submitted to the SEC by the chamber.
In their comments on the climate disclosure proposal, the Republican attorneys general and the chamber each cite Business Roundtable v. SEC claiming that the SEC’s cost-benefit analysis is flawed.
The Republican letter is co-led by Patrick Morrisey, the West Virginia Attorney General who recently led a successful legal challenge against the Environmental Protection Agency (EPA).
In West Virginia v EPA, the Supreme Court approved a relatively new legal notion — the so-called “big issues doctrine” — to halt an EPA effort to regulate greenhouse gas emissions from power plants. . As the Bulletin of the Atomic Scientists explained, “Under this doctrine, when a settlement crosses a certain threshold of ‘major’ – a line that remains ill-defined – the court rejects the settlement unless it has been clearly authorized by Congress.”
The major issues doctrine appears to be the basis of Morrisey’s campaign against the climate disclosure rule. During a television appearance in July, Morrisey said the Biden administration “can’t get congressional majorities behind their policies, so they’re trying to use the [regulations]. But as we saw with West Virginia v EPA, I don’t think the courts are going to let that happen. (Morsey’s office did not respond to emails seeking comment.)
“I don’t think there is any natural reason to infer that the court’s decision [in West Virginia v EPA] would have implications for the SEC,” said Jill Fisch of the University of Pennsylvania. “At the same time, you can read the West Virginia case and you can say, ‘This is part of the Supreme Court, and federal courts generally, taking a different look at government agencies. It is to reduce the fourth branch, the power of the administrative state. And if that’s true, in theory, everything is to be won.
“Historic legal precedent suggests the SEC has a pretty strong case,” said Tyler Gellasch, president and CEO of the nonprofit Healthy Markets Association. “But if you’re the Business Roundtable, you don’t necessarily need historical legal precedent on your side. You just need a court today. And that seems far more likely today than it would have at any point in modern history.
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