Chevron Ruling Intensifies Threats to SEC Climate Rule
The Supreme Court’s overturning of 40-year-old precedent has opened litigation floodgates, but investors can be “voice of reason”.
Last week’s overturning of the Chevron precedent by the US Supreme Court places climate-focused rulemaking at risk, according to US investor bodies, requiring investors to amplify its importance to their decision-making processes.
Chevron held that a federal agency’s reasonable interpretation of an ambiguous law should be honoured, allowing agencies to set and install their own rules. The Supreme Court’s 6-3 decision last week to overturn the 1984 doctrine means that the onus to interpret regulatory law has now been placed squarely in the hands of the judicial branch.
There is concern that giving courts more scope to challenge agencies will make it easier to strike down regulations aimed at addressing ESG risk factors. It will also make it harder for agencies to set rules and requirements that can support US investors’ efforts to transition to a low-carbon economy.
“What we have seen from the Supreme Court is an almost wholesale dismantling of the administrative law system that governs corporate behaviour and protects citizens and the environment,” Danielle Fugere, President and Chief Counsel at US shareholder advocacy group As You Sow (AYS), told ESG Investor.
She claimed the recent raft of measures taken by the Supreme Court to limit federal agency powers is part of a “juggernaut of conservative action against basic regulation”.
“This has been a long-term strategy by [the anti-ESG and conservative] movement, which is now bearing fruit in this wildly lawless Supreme Court,” she noted. “They have thrown precedent to the wind.”
Until now, federal agencies – and President Joe Biden himself – have been able to interpret existing laws to account for today’s context, explained Bryan McGannon, Managing Director of the US Sustainable Investment Forum (US SIF).
“No one setting laws 40 years ago thought about climate change the way we do today,” he said, adding that rulemaking would now need to slow down.
“Agencies are going to take a lot more time to make sure any rules survive post-Chevron challenges. And Congress is going to be forced to write laws that are prescriptive enough [that they don’t require interpretation] or to figure out a way to give durable authority to agencies,” McGannon said.
“Congress has a hard enough time agreeing what colour the sky is – let alone making these kinds of decisions.”
Chief Justice John Roberts defended the Supreme Court’s decision, writing that agencies have no special competence in resolving statutory ambiguities. “Courts do,” he said.
Target list
The US Securities and Exchange Commission’s (SEC) climate risk disclosure rule – which requires US-listed companies to disclose their exposures to climate-related financial risks – is seen as under particular threat.
The SEC adopted the disclosure requirements in March, but, less than a month later, the agency issued another order staying the rule, following a number of petitions for review.
“The argument will be that Congress never authorised the SEC to set rules on climate,” said McGannon. “But under the ‘34 Act, the SEC has clear authority to do disclosure. The SEC isn’t telling firms what they can invest in, only that they must disclose the attributes – just like they would for any other disclosure rules.”
The SEC’s proposed requirements would improve transparency and the flow of information for investors, said Fugere.
“Investors want this information to make informed financial decisions – this is what a capitalist system needs,” she said.
The outcome of challenges against the SEC’s rule will likely be influenced by the Supreme Court’s reversal of the Chevron precedent, Fugere added. “Given what we have seen from the anti-ESG and conservative forces, my guess is that the Supreme Court [and other courts] will wilfully ignore the priority of investors, which is risk management.”
But the ruling would not impact individual states in the process of introducing or considering climate disclosure rules, such as California, Illinois and New York.
ERISA at risk?
There is less certainty as to the implications of the Supreme Court decision for the Employee Retirement Income Security Act (ERISA), which has been subject to a tug-of-war between Republicans and Democrats in recent years.
Published in 2022 and following an executive order from Biden, the ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights’ rule clarified that a fiduciary of pension plans can consider ESG as a material factor that can inform investment and proxy voting decisions.
In September last year, a court in the Northern District of Texas rejected a challenge asserted by 25 Republican state attorneys-general that the rule violated both ERISA and the Administrative Procedures Act (APA).
In a letter addressing the Supreme Court’s decision to overturn Chevron, the Department of Justice (DOJ) defended the ERISA rule, noting that “across administrations, the [DOJ] has recognised that when fiduciaries cannot choose among investments on the basis of risk and return, and prudence requires that they make a choice, ERISA leaves them free to consider factors other than risk and return”.
There should be no reason for the court to disagree with the view of the agency charged with interpreting ERISA, it added.
“It’s currently not clear if the overturning of Chevron will have any impact on the ERISA rule,” said McGannon.
Voice of reason
In addition to overturning the Chevron precedent, the Supreme Court has also recently restricted the ability of agencies like the SEC to impose penalties for violation of laws through administrative tribunals, insisting that such penalties must now be adjudicated in the courts.
“Agencies primarily go through these administrative tribunals to impose fines – it’s far less costly and time-consuming for all involved,” said Fugere. “You can have the best laws in the world, but if they can’t be enforced [by agencies], then we’re simply not going to see high compliance with these laws.”
In addition, the Supreme Court has done away with the six-year statute of limitations on challenges to new regulations.
“Now, every single law companies aren’t happy with can be challenged,” said Fugere.
While it’s “difficult to overstate the impact” of the Chevron decision, according to Ropes & Gray, due to the preponderance of statutory ambiguities, the law firm said more potential changes to administrative law may be on the horizon.
In the short- to medium term, these are expected to open the door to more legal challenges and subsequently delay the enactment of any future federal regulations.
With agencies “cut off at the knees”, McGannon said he expects company engagements to become a “much more visible and active space for investors”.
Fugere said investors should use their position to positively influence companies to prioritise climate and other sustainability themes. “A voice of stability has never been so important in this volatile situation,” she said.
As well as engaging with companies, investors must use that voice on the political stage.
“Sustainability-minded investors must engage with policymakers on issues such as disclosure – making it clear that they need climate-related information to make good financial decisions,” said McGannon.
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