The Securities and Exchange Commission has formally proposed rules to rescind its previously adopted Climate Related Disclosure Rules (Final Rules) in their entirety, asserting that (1) the rules exceeded the commission’s statutory authority, and (2) even if the commission possessed adequate authority to adopt the rules, several policy reasons exist to support rescission.
The Final Rules have been stayed since April 2024 and never took effect. However, in the pending consolidated litigation challenging the rules, the Eighth Circuit Court of Appeals directed the commission to either reconsider the rules through notice-and-comment rulemaking or renew its defense in litigation. The proposed rules satisfy this directive by formally initiating the rulemaking process to rescind the Final Rules.
The proposed rules are subject to a 60-day public comment period following publication in the Federal Register.
Exceeding Statutory Authority
The commission’s primary legal argument is that the Final Rules represent a “dramatic overreach" of the agency’s disclosure authority under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). Under those statutes, the commission may except from or add to disclosures only where doing so is “necessary or appropriate in the public interest” and for the “protection of investors,” and any such disclosures must relate to a registrant’s “business or financial characteristics,” as restricted by Congress itself. The commission asserts that the Final Rules mandate highly specific and granular disclosures on the sole topic of climate-related matters, which do not fit within those statutory parameters, including requirements to disclose greenhouse gas emissions, scenario analysis, internal carbon prices, and board-level governance of climate risks.
The proposal further invokes the “major questions” doctrine, arguing that Congress has not clearly authorized the commission to embark on expansive regulation of climate change, a substantial policy area of “vast economic and political significance.” Furthermore, the commission argues that common sense suggests that Congress would not allocate authority over climate change and related matters to the commission, an agency with no expertise, scientific or otherwise, related to climate-related risks or the criteria or analytical frameworks to be used in evaluating such risks, over a more well-suited agency such as the Environmental Protection Agency. The commission also contends that the Final Rules improperly intrude on state authority over core matters of corporate governance, noting that the prescriptive requirements effectively regulate issuers’ internal affairs, raising federalism concerns.
Policy Reasons for Rescission
Separate from the question of authority, the commission advances four policy arguments for rescinding the Final Rules.
The Final Rules Are Unnecessary and Inconsistent with the Commission’s Materiality-Based Disclosure Approach
The commission argues that existing disclosure requirements, as well as anti-fraud provisions in the Securities Act and Exchange Act, already elicit material information about climate-related matters in a manner tailored to each registrant’s specific circumstances. The commission’s 2010 Guidance Regarding Disclosure Related to Climate Change identifies how existing disclosure requirements apply to climate risks. The commission asserts that the Final Rules are inconsistent with and inferior to its long-standing, principles-based, registrant-specific approach to disclosure rooted in materiality, instead imposing one-size-fits-all requirements that may bury investors in an “avalanche” of information unlikely to be material to a reasonable investor’s decision-making.
The Final Rules Stray Well Beyond the Policy Concerns of the Federal Securities Laws
The commission emphasizes that the Final Rules concern the “divisive and unsettled political and social issue of climate regulation,” which falls outside the policy concerns of the federal securities laws. The commission further argues that its role is not to regulate how companies manage climate-related effects or to “hijack the public company reporting regime to further social policies unrelated to the aims of the Federal securities laws,” and that absent a clear statutory directive, such questions are for Congress, not agency officials, to decide.
The Final Rules Impose Unjustified Costs
The commission estimates that rescinding the Final Rules could generate annualized savings of approximately $4.9 billion per year over the next 10 years for all affected registrants, with per-registrant annual compliance costs originally estimated to range from less than $197,000 to over $739,000. The proposal argues that these costs are not justified by the Final Rules’ informational benefits for two reasons: first, existing disclosure requirements already capture any material climate-related information that investors need; and second, the Final Rules primarily serve the particularized demands of a subset of investors pursuing climate-focused strategies, rather than the broader informational needs of the reasonable investor. The commission also finds that materiality qualifiers embedded in the Final Rules fail to adequately mitigate these burdens, given the complexity of the assessments required and the potential for over-disclosure driven by litigation risk.
The Final Rules Impede Capital Formation
Finally, the commission argues that the Final Rules are at odds with its current policy objective of encouraging companies to go public and remain public. The commission notes that the number of public companies has declined significantly since 2000, with some observers pointing to disclosure costs as a contributing factor. The proposed rescission of the Final Rules is expected to lower barriers to entry into public capital markets, particularly for smaller companies, and reduce the relative disadvantage faced by smaller reporting companies and emerging growth companies. The commission also notes that costly regulation can divert resources from production, investment and innovation, and may cause companies to exit public markets altogether or remain privately held, thereby widening the transparency gap between public and private companies.
International Developments
The commission also points to recent international developments, including the European Union’s efforts to narrow the coverage and scope of its recently adopted sustainability directives and extend implementation timelines, as underscoring the flaws of a prescriptive, one-size-fits-all approach to climate disclosure, an evolving area. The proposal further notes that the Final Rules could discourage voluntary climate initiatives and innovation, expose registrants to additional litigation risk, and reveal competitively sensitive or proprietary information to rivals.