By Janelle M. Lewis, Attorney, Business & Legal Strategic Consultant
Environmental, Social and Governance, otherwise known as ESG, has become tied to a businesses’ strategic values and goals. The Environmental aspect of ESG is defined as the business’ impact on the natural environmental, such as carbon emissions and/or the use of renewable energy sources. Ultimately, it comes down to how a business address climate change and what does that mean for the business’ value chain. From the investor’s side, many shareholders are applying these non-financial factors, such as a business’ environmental impact, in order to identify material risks and growth opportunities from their investment activities.
The Securities and Exchange Commission & Climate Change
The Securities and Exchange Commission (SEC) issued a proposed rule entitled “The Enhancement and Standardization of Climate-Related Disclosures for Investors” on March 21st, 2022. According to the SEC’s Fact Sheet on its proposed climate-disclosure rule, the SEC would require both domestic and foreign entities who are registered with the SEC to include the following in their registration statements, annual reports and mandatory disclosures:
● Climate-related risks and their actual or likely material impacts on the business’ strategy, and outlook;
● The business’ governance of climate-related risks and relevant risk management processes;
● The business’ greenhouse gas (“GHG”) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
● Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
● Information about climate-related targets and goals, and transition plan, if any.
The Supreme Court’s Decision in West Virginia v. EPA
The U.S. Supreme Court’s Decision in West Virginia v. EPA
In its decision West Virginia et al. v. Environmental Protection Agency (WV v. EPA), the Supreme Court enshrined the Major Questions Doctrine (MQD) as a key tool for statutory interpretation when it is seen that an administrative agency’s final rule is considered a “major rule” which brings rise to it being an “extraordinary case.” Under such circumstances, the Supreme Court held that the agency must point to “clear congressional authorization,” for the power the agency claims to have in order to promulgate the respective final rule. In other words, if Congress does not explicitly give administrative authority to correspond to an agency’s final rule, then that rule under the MQD analysis will not survive.
Will the SEC’s Proposed Climate-Disclosure Rule Survive MQD Statutory Interpretation?
Although the Supreme Court’s decision in WV v. EPA does not directly affect the SEC’s proposed climate-disclosure rule, it does not mean that it will not when it becomes a final rule. Since the Supreme Court did not provide clear guidelines under which it will apply the MQD Statutory Interpretation (nor make any reference to the Chevron Doctrine as to if and when it is applicable going forward), it is unknown whether SEC’s proposed climate-disclosure rule will ever come under the Court’s scrutiny. What is clear is the suggestion from the ruling that SEC, as well as other administrative agencies, will need to emphasize the clear statutory basis for their rule. From a political perspective, support for SEC’s proposed climate-disclose rule seems to come mainly from Democrats, who find that the additional climate risk disclosures creates a more standardized and comprehensive reporting system that will facilitate investors to make more well-informed decisions. On the other hand, Republicans argue that the SEC’s proposed climate-disclosure rule oversteps its authority because the proposed rule does not serve shareholders financial interests but is attempting to regulate social issues.
What Does This Mean For Climate Related Factors in the Business Strategies of SEC Registered Businesses?
While it remains unclear if the SEC’s proposed climate-disclosure rule will face scrutiny by the Supreme Court, there is a strong possibility that once SEC publishes the final rule in the Federal Register, there will be litigation over whether SEC has the authority to issue such a rule. These litigations will range from lawsuits over whether the SEC has the authority to issue the final rule to whether there is clear congressional authority to support the SEC’s ability to promulgate its final climate-disclosure rule. What this means for the business strategy of SEC registered businesses is that the potential level playing field in which they execute their business activities may become upended. From a competitive advantage perspective, for one business to undertake more stringent climate change control business strategy could put it at a disadvantage if other registered businesses are not incentivized to do the same. From the perspective of the value chain, the interconnectedness of certain activities, such as infrastructure, operations, and logistics to climate change could impact a registered business’ profit margins. As with competitive advantage, if a registered business takes a more stringent approach to lessen their environmental impact compared to their competitors, this could result in a decrease in profit margins for the former. On the other hand, primary activities of the value chain, such as marketing & sales could prove beneficial to a company who adopts a more “climate friendly” business strategic agenda, depending on whereby investors might see more value and growth opportunities in these registered businesses.
What is Certain
What is certain is that WV vs. EPA has created more uncertainty as to whether administrative agencies, such as SEC, will be able to promulgate rules if it is not explicitly supported by legislative intent. In other words and specific to the SEC’s proposed climate-disclose rule is whether it will be afforded to deterrence under Chevron or have to undergo the scrutiny of the MQD. What is also certain is that SEC registered businesses will have to factor this legal uncertainty in the business strategies.