Shockwaves hit publicly traded companies in March of 2022 when the SEC announced its proposed rule that would require public companies to include certain climate-related disclosures in their annual reports and registration statements. But now, thanks to the Supreme Court’s decision in West Virginia v. EPA, those new rules – and many others – are seriously in question.
Recently, the Supreme Court has played a bigger and bigger role in shaping regulatory and compliance outcomes. Since 2018, when the Court unanimously held in Digital Realty Trust, Inc. v. Somers that internal whistleblowing did not qualify individuals to the Dodd-Frank protections against retaliation, the Court’s reach has become larger.
What happened in West Virginia
Over three presidential administrations, the EPA went back and forth with its Clean Power Plan, which was created to limit greenhouse gas emissions from power plants. The Plan required increasing the use of cleaner energy like solar and wind and reducing the use of coal. The state of West Virginia and several other parties sued to block the regulations.
The Supreme Court took up the case and ruled in June 2022 that the EPA had overstepped its remit by enacting a sweeping regulatory scheme beyond that which had been authorized by Congress. They focused on the “major questions doctrine,” which, in a nutshell, says that when there is a question of “vast economic and political significance,” an administrative agency must identify a clear legislative statement made by Congress granting the agency the authority to use regulation to answer the question. Since Congress had made no such grant to the EPA to regulate the specific use of various types of energy, the Clean Power Plan could not be enforced.
Why this matters to compliance and ESG practitioners
Although this is the first time the major questions doctrine has been specifically relied upon, it follows a long list of cases upon which the core principle relies. This includes, notably for compliance practitioners, the decisions relating to the Occupational Safety and Health Administration’s (OSHA) attempted COVID-19 vaccine mandate.
The major questions doctrine can, and will likely, undermine many proposed or contemplated regulatory schemes. The West Virginia ruling sets the scene for court fights that may reign in the power of administrative agencies, especially when the agency’s remit does not traditionally cover the area of regulation. The ruling goes well beyond the EPA. It affects all federal agencies and provides a potent tool for petitioners to argue against administrative actions.
These cases will lead to companies and compliance programs being stuck in limbo awaiting final answers from the court. What’s worse? Some judges may stay the regulations while the cases work their way through the courts. Others may not, which means that the regulations may be in force for some time, while compliance and ESG practitioners wait to see whether the regulations will hold up in the long term.
Why the SEC’s proposed disclosure rules are in question
Critics argue that the SEC’s remit is to (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation – not to regulate climate change disclosures. Of the SEC’s proposed rules, a Wall Street Journal opinion piece stated that “the proposal would convert the federal securities regulator into a greenhouse-gas enforcer looking over the shoulders of exchange-listed companies’ directors.” These critics state that the SEC’s mandate only focuses on regulating the materiality of financial disclosures, not climate change. The SEC’s position may be that, because so many investors care deeply about climate change, such disclosures are material to financial decisions.
Regardless, the major questions doctrine will likely be used to challenge the SEC’s final set of rules governing climate change disclosure. The Court’s West Virginia opinion states that congressional authorization is required for an agency to regulate matters of great political or economic significance. Climate change is most certainly a matter of great political significance, and companies have been publicly decrying the cost of implementing the proposed disclosure rules since they came out.
Absent a grant of specific power to the SEC to regulate climate disclosures, petitioners may be successful in their challenge. Congress has, thus far, not tasked the SEC with regulating climate change disclosures, and the divided house and senate are unlikely to do so in the upcoming term.
It’s not just the climate change disclosures
Because the major questions doctrine applies to all federal agencies, other potential regulatory schemes may be challenged. After the recent collapse of the FTX Cryptocurrency Exchange and the resulting loss of over a billion dollars in customer funds, calls for the regulation of the cryptocurrency industry have grown louder. However, Congress has not tasked any administrative agency with tackling the problem, and therefore, under the major questions doctrine, until that happens, it may be argued that no agency has enforcement capacity.
Likewise, other regulations may be called into question. One law firm wrote that, in addition to cryptocurrency oversight, “other blockchain products, capital market regulations, FTC oversight, and antitrust and competition law” may be challenged in court using the major questions doctrine.
Congress may need to address how digital assets should be regulated, granting authority to the SEC or some other agency. If it does not, arguments will continue to rage about whether the SEC or other agency would be overstepping their mandate if they create new schemes or laws to regulate that market.
What about emerging threats?
The West Virginia decision calls into question new schemes meant to regulate new technologies or emerging threats. For instance, if the next generation of technology invades privacy in a way not currently contemplated within the mandate of the FTC, does that mean that Congress will have to grant authority specifically over the technology in order to regulate it? Quite possibly.
Global implications
American regulations aren’t the only game in town, of course. The SEC’s rules on climate change disclosure have pushed many American companies to ramp up their ESG efforts. However, slowing those efforts down due to Supreme Court action won’t stop the ESG disclosure push from other parts of the world. According to the Harvard Law School Forum on Corporate Governance, “Those who wonder what tomorrow’s ESG regulation may be like should usefully turn to the EU, which has initiated significant reforms in this area for several years, most often based on the French model.”
The same is true for the cryptocurrency market. In October 2022, the European Union took a major step toward regulating cryptocurrency when the European Council approved the comprehensive Markets in Crypto-Assets regulation. While the vote in the European Parliament isn’t expected until February 2023, the regulation, nicknamed MiCA, is widely expected to pass. In its current form, it would require crypto companies such as wallet providers and exchange platforms to seek authorization from national regulators within the EU.
What compliance officers should do now
All of this uncertainty puts compliance officers in a difficult place. To manage this challenge:
- Identify the regulatory schemes that are likely to be challenged: The first thing to do is to identify the regulatory schemes that are likely to be challenged, then determine if they affect your business. If they do, then…
- Make a tentative plan: Look at the proposed regulation and make a plan to comply with it. See if you can find synergies between other laws applying to your company in other parts of the world. Let them guide your planning.
- Watch carefully: Many law firms put out alerts when the courts rule on significant regulatory matters or Congress passes important regulations affecting businesses. Ask to be added to the lists of these firms so you are alerted to these changes.
- Pay attention to the rest of the world: When it comes to ESG, climate change, or privacy, look to Europe to guide your actions. Many European laws are, by design, meant to capture a company selling into the European Union even if the company has no physical presence in the bloc. By following European laws, you are likely to find yourself in compliance with many American laws when they come into force.
2023 prediction
The American regulatory landscape is likely to change in the wake of the West Virginia decision, but that doesn’t mean the rest of the world will follow suit. We predict that if the SEC’s rules are finalized in line with what was previously published, they may be challenged in court under the major questions doctrine, which might hold them up from being implemented or require revision. Other regulatory schemes may be challenged using the same grounds, which will cause uncertainty in the compliance and ESG world while the courts sort out which regulatory schemes can stay in place or be implemented. Pay attention, make a plan, and always follow the path of ethics and integrity to have a strong, defensible, and sustainable compliance program.
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