SEC will be sued after climate disclosure rule is finalized

Jefferies analysts predict lawsuits loom as rule expected in October

SEC crest


Laura Miller

Lawsuits to block the US Securities and Exchange Commission (SEC) final rule for climate risk disclosures will quickly follow its release, according to analysts at Jefferies.

The final rule is expected in October and has attracted much response, with the SEC receiving 15,859 comment letters about its planned push for more data, standardization and disclosure on climate change issues.

Within the around 2,500 substantive comments from these letters, they are divided fairly evenly: a third want the SEC to do more, a third suggest changes here and there, and a third say the SEC should not be doing this.

“We fully expect that, after the climate disclosure rule is finalized, the SEC will be sued by various parties including trade groups, red state attorney generals, and industry,” Jefferies analysts said.

If the SEC loses in court after publishing its final rules, the agency has to wait five years to re-engage on the same rulemaking. 

“There is a lot at stake here. The SEC knows this, and that’s why it’s taking time to make sure the final rule is legally durable,” the analysts added.

Government pressure

Capitol Asset Strategies president Jason Mulvihill, in a presentation to Jefferies’ analysts, said he expects the final rule on fund disclosures also in the fourth quarter, and the SEC’s human capital management proposal around the end of the year, with a final rule in the first half of 2024 to avoid potential Congressional Review.

However the analysts at Jeffries, and Mulvihill, pointed to pushback to the SEC, coming from each branch of the US federal government.

In respect of the legislative branch, in light of the hearings from “ESG Month”, challenging the SEC’s authority to regulate on ESG issues was a top two Republican focus throughout the hearings, with the other being proxy advisory reform, they said.

Pressure on the SEC from the judicial branch of government is expected from the Supreme Court, which will play a major role in the SEC’s authority going forward, and has shown a willingness to rule against the SEC’s decision-making. 

Following the Supreme Court’s rulings on the Environmental Protection Agency, including both the ability to regulate power plant emissions as well as the ruling on the Clean Water Act, the Supreme Court is widely expected to reverse the Chevron Doctrine. This would limit the ability of agencies such as the SEC to interpret statutes.

Finally from the executive branch, analysts at Jeffries expect ESG backlash to continue, and the conversation to bleed into the presidential election campaigns. 

“We are closely watching how this plays out, and how the upcoming election will impact the timing and urgency of the SEC in the current administration,” the analysts said.


On the proposed rule ESG Disclosures for Investment Advisers, Capitol Asset Strategies’s Mulvihill argued it has the potential to increase greenwashing due to the murkiness of the three buckets of funds – this would be the opposite impact that the SEC intended. 

Mulvihill argues all funds would, at a minimum, be considered integration funds.

On the human capital management disclosure proposal, Mulvihill expects this to be prescriptive and quantitative, contrary to its principles-based approach to Reg S-K. 

Unlike how the SEC used the Greenhouse Gas (GHG) Protocol as a way to standardize GHG metric reporting, the SEC will likely not require a specific methodology for calculating a human capital metrics, Mulvihill said.

The SEC may instead require the disclosure of methodologies and any changes to methodologies. Human capital disclosures may end up being streamlined in an attempt to get out given resource limitations, he said.

Mulvihill added: “Ultimately, it would be an utter failure for the SEC to not finalize these three proposals before the presidential election, but the SEC can’t rush this either.”

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