Did Loper Bright Kill the SEC’s Climate Disclosure Rules?
Following the US Supreme Court’s overturning of Chevron, Michael Gold, Partner at Saul Ewing, considers the future of the agency’s rule-setting.
“Today, the Court places a tombstone on Chevron no one can miss,” states Justice Gorsuch in his concurring opinion in Loper Bright vs. Raimondo. The question becomes does Loper Bright also “place a tombstone” on the Securities Exchange Commission’s (SEC) climate disclosure rules? The answer: not necessarily, but Loper Bright complicates the path to clarity for companies and investors when it comes to climate-change related disclosures.
Iowa vs. SEC
In the consolidated case Iowa vs. SEC, numerous states seek judicial review of the SEC’s climate disclosure rules. As of this writing, the case continues before the US Court of Appeals for the Eighth Circuit.
Iowa was initiated before Loper Bright was decided, and much of the litigants’ briefing to date – between the parties and among the numerous states and organisations appearing in the case as amicus curiae – has been about the court’s ‘major questions’ doctrine, which the court has cited approvingly in recent cases such as Biden vs. Nebraska (2023) and West Virginia vs. EPA (2022).
The reasoning of the doctrine is that as to matters with significant economic and political implications, Congress would have to clearly authorise an agency for the agency to promulgate rules with such significant implications. In Iowa, the states are arguing that the regulation has significant and broad consequences and, thus, Congress needed to have clearly granted the SEC the authority to deal with those issues and it did not.
The SEC both disputes the application of the doctrine and argues that, even if applicable, Congress did give the SEC clear authority to promulgate disclosure rules.
Iowa was brought before the US Supreme Court’s decision in Loper Bright overruled Chevron, USA vs. Natural Resources Defense Council, and the doctrine of Chevron deference. Chevron created the framework that has been utilised by courts in connection with judicial review of an administration agency’s statutory interpretation for the last 40 years.
Under Chevron, if a statute was silent or ambiguous as to a matter, a reviewing court was to defer to the agency’s reasonable interpretation of the statute. The central holding of Loper Bright is that it is up to the courts to interpret the law – not the agencies – and the courts should not defer to an agency’s interpretation of statutes, but instead exercise their independent judgment in deciding whether an agency has acted within its statutory authority.
By explicitly overruling Chevron, however, the court in Loper Bright harkens back to what it believes was the law before Chevron, and approvingly acknowledges the standard articulated in the Court’s 1944 ruling in Skidmore v. Swift.
Under Skidmore, in determining whether an agency has acted within its own statutory authority, the court can and should consider the body of experience and informed judgment of the agency within their areas of expertise. Loper Bright says that the agency’s interpretation cannot bind the court, but the agency’s interpretation may be “especially informative” and may have the “power to persuade if lacking the power to control”. This is a subtle difference from Chevron deference, but an important one, particularly when considering whether the SEC’s climate change rules will see the light of day and when.
Loper Bright has not been cited heavily in the briefing in Iowa to date, but it does provide the anti-regulation litigants a secondary line of attack if they lose on the major questions doctrine and related arguments. Whereas the arguments against the regulation based on the major decisions doctrine are intended to negate the disclosure rules in their entirety by seeking a ruling that the SEC did not have the authority to disseminate these rules at all, the litigants can follow-up with arguments that specific provisions of the rules are contrary to existing law based on Loper Bright.
Perhaps most troubling is that the ruling in Loper Bright could significantly further delay resolution of the existing uncertainty as to what the final climate change disclosure rules will be.
Under Chevron, the courts may well have determined they need to defer to the SEC’s decisions on these rules. Under Loper Bright, the courts will need to review each aspect of these rules with their own independent judgment. Skidmore provides an avenue for the courts to consider and, if so inclined, credit the SEC’s expertise on these matters.
However, considering each of these rules on a case-by-case basis – and building a record as to the legality of each rule for the court to make its decisions – will take significant time and effort. If the SEC determines it is worth that effort to continue to push for the rules, it could be quite some time before the final form of the rules will be determined.
Putting this all together, what does it mean for the actual enactment of climate-related disclosure rules by the SEC?
Fate of the rules as they stand now
It is hard to predict whether the Eighth Circuit, and ultimately the Supreme Court, will void the disclosure rules in their current form. The SEC has a good argument that promulgating disclosure rules, whether on environmental laws or otherwise, are integral to its mission as delineated by the Securities Act of 1933 and the Securities Exchange Act of 1934. However, opponents of the regulation may well find sympathetic ears in the Eighth Circuit or the Supreme Court for their arguments that these rules are in fact environmental regulation and that is not in the SEC’s charge.
Even if the courts do find that the SEC has the authority to promulgate climate change rules, as noted above, the rules could still likely face further objections and further litigation on whether any policy decision inherent in each rule was consistent with the SEC’s governing statutes. Under Loper Bright, courts will not defer to the agency but will have to create their own record to support their eventual findings. This could substantially delay the rules becoming effective.
If it must, the SEC may try again
The courts may strike down the rules but on grounds that allow the SEC to restart the process.
To do this, the courts would have to determine that the SEC has the authority to promulgate ‘some’ environmental or climate change disclosure rules (which should be obvious), but not the scope and breadth of the rules that they did adopt. In that case, the SEC would need to restart the rule-making process.
The first question would be whether the SEC still wants to try to climb that mountain, which is partly a political question, and the answer might be different based on who wins the next election and who is subsequently the chair of the SEC.
Assuming the SEC does try again, it will do so in the post Loper Bright world and will need to anticipate that the courts will be asked to scrutinise whether each of the rules fit into the statutory authority. Anticipating these arguments and Loper Bright’s charge to the lower courts to interpret the law, the SEC will have to double-down on the work it does and the record it builds to support the rules. This will again take time – time in which industry and investors will be left with uncertainty as to the final rules.
What should companies and investors do now?
Industry can’t wait for the courts and the SEC to determine the final rules. Companies are making decisions now about how they will address climate-related problems going forward. Investors have been and will continue to insist that companies assess this risk and disclose what those risks are and how they plan to address them. Companies should continue to follow the SEC’s 2010 ‘Commission Guidance Regarding Disclosure Related to Climate Change’ and evaluate which parts of the 2024 rules they can incorporate into their public filings now.
Investors should encourage their companies to make such disclosures and can publish their own guidelines as to what investors expect to see in their disclosures. There will be additional costs if later companies are required to adapt to any final rules that eventually do survive challenge in the courts.
However, as investors increasingly determine that these disclosures are critical to evaluating the potential success of their investments, the cost of waiting for final action will grow too high and companies will likely increase their disclosure as a result of sheer market forces.
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