On Friday, March 15, 2024, the United States Court of Appeals for the Fifth Circuit issued an administrative stay on the application of the SEC's new rules regarding climate-related disclosures for investors, which we covered in previous posts here, here and here. While similar litigation is pending in other jurisdictions, the Fifth Circuit was the first to rule, issuing a one-sentence order imposing the stay only nine days after the rules were adopted.
The petitioners – led by participants in the fracking industry but including several states – challenge the rule under the "major-questions doctrine," arguing essentially that the SEC lacks clear authority to issue the rule. They also argue that the rule is arbitrary and capricious and a violation of the First Amendment. The SEC vigorously contested these assertions and will doubtless seek to overturn the stay.
We think these initial salvos in the fight over climate-related disclosures are unlikely to have a material impact on the short-term plans of most public companies. As we outlined in our post earlier this month, the rule imposes no new disclosure requirements for fiscal years beginning in 2024. The new requirements for fiscal years beginning in 2025 will apply only to large accelerated filers, which represent about one-third of all issuers. While accelerated filers and non-accelerated filers have even more time to implement compliance procedures, all filers must prepare for the possibility that the court challenge will fail and that compliance with the rule will be mandatory.
The litigation may even backfire, potentially leading climate-change advocates to press public companies even more vigorously for detailed voluntary disclosures about greenhouse gas emissions and climate-related risks. Some advocates have already commenced litigation arguing that the SEC's climate rules did not go far enough.
In our view, companies would be wise to continue their preparations for compliance with the new rules. While the litigation may result in the invalidation of some rules and the modification of others, it is too early to predict the final outcome of the litigation. Delaying compliance efforts carries the risk of being caught unprepared, which could lead to both private securities litigation and enforcement actions by the SEC staff.
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