The US Supreme Court may have stunned the world with its recent ruling over abortion, but it is a very different decision—on carbon emissions—that has corporate governance observers speculating.

The ruling, West Virginia v. the Environmental Protection Agency (EPA) , has left many believing it could be used as ammunition by those seeking to challenge new climate reporting rules. These are under development by the Securities and Exchange Commission (SEC), the most high-profile financial watchdog in the US.

According to Michael Littenberg, global head of ESG, CSR and business and human rights at New York law firm Ropes & Gray: “The ruling in West Virginia v. EPA will be another basis on which plaintiffs challenge the climate disclosure rules.”

The West Virginia case began in 2015, after the EPA concluded that coal-fired power stations were unlikely to cut carbon emissions to safe standards, so ordered their operators to reduce output or seek alternative, cleaner sources of power generation.

That decision was challenged by the state of West Virginia and the Supreme Court ruled last week, limiting the powers of the EPA, and concluding that only Congress has the powers assumed by the regulator.

Begging to defer

The court managed this by overthrowing what is known as the “doctrine of deference”—the idea that Supreme Court judges do not involve themselves in delegated regulatory matters. The court decided deference only counts for what the New York Times described as “unimportant matters”. Where issues are “major questions”, the court decided it had room to become involved.

It’s the court shrugging off “deference” that has observers concerned it provides a basis on which to confront the SEC over climate reporting measures.

“It threatens the ability of federal agencies to issue rules of any kind, including the regulations that ensure the safety of food, medicines and other consumer products, that protect workers from injuries and that prevent finance panics,” writes The New York Times. A headline in The Wall Street Journal warned: “Supreme Court ruling adds obstacles to SEC policies.” The newspaper quotes one observer saying that corporate lawyers across the US will use the EPA ruling to “fashion their arguments against SEC rule-making…”.

The SEC revealed its proposed new rules—intended to catch up with standards in place in the UK, Europe and elsewhere—in March. A consultation has garnered 14,000 responses, but the rules are yet to come into force.

Conservative business interests have argued against the new disclosures on climate and emissions, some arguing they are part of a “woke” liberal agenda. Polarisation over corporate governance as part of the broader US political landscape has been growing in intensity.

But while conservatives may be honing their EPA arguments, Jeff Gordon, a professor at Columbia Law School, says there may be bigger risks on the horizon. His view is that those opposed to the SEC’s new rules will claim they fail to satisfy a “cost-benefit” analysis.

“A court hostile to the SEC enterprise and seeing that Congress has been silent on climate change (refusing to act on proposed legislation) may decide to jump in and use that as a cudgel,” he says.

However, he also points out that “Congressional inaction” could also be interpreted as a “let’s see how that works out before we substantively regulate” conclusion.

A force for good

For others, the US legislative landscape may buffer the SEC from challenge. Nell Minow, vice chair of ValueEdge, high profile advisers to US shareholders, says rules already in place ensuring “transparency and accountability”, cost-benefit analysis and the power of Congress to overturn any regulation it takes a disliking to “all support the delegated authority to issue rules with the force of federal law”.

Then there’s the nature of SEC’s powers, she says, which are quite different from the EPA’s. “They are non-prescriptive,” says Minow. “They can’t tell companies to do anything, but they can insist that they disclose what they are and are not doing, if material to investors’ ability to assess investment risk and return.

“So, let’s say SCOTUS [the Supreme Court] threw out all the EPA rules about emissions. The SEC can still tell companies to report on emissions.”

The SEC may also have a superpower. Its status is an “independent commission” rather than an executive branch agency like the EPA, “may also be the basis for more deference,” says Minow.

Michael Littenberg sees the SEC potentially challenged on many fronts. Claimants could argue that reporting rules are “compelled speech”, which breaks the First Amendment clause on freedom of speech, while the rules could be claimed to fall short of satisfying “procedural requirements” outlined in the Administrative Procedure Act.

That said, the SEC will do its best to come up with reporting rules that will survive challenge, he says. “However, that process is more art than science and it’s unlikely the SEC can come up with climate disclosure rules that plaintiffs will not feel are worth the time challenging.”

The SEC may issue climate disclosure rules to match others anywhere else in the world, but it looks very much like they will prompt a battle in the courts. The EPA decision only serves to bolster the confidence of those ready to muster their forces.

But, for many, the endgame is not the rules in themselves but a reduction in carbon emissions and heading off climate change. Observers remain optimistic the business world may still contribute, with or without mandated disclosure requirements.

“US corporate governance will continue to evolve,” says Littenberg. “ESG-related governance has significantly advanced and related disclosures have dramatically expanded over the last few years, both as a matter of good business practice and stakeholder pressures.

“Those factors will continue to be relevant, even in the absence of further regulation. Furthermore, pressures for enhanced ESG disclosure will likely increase if stakeholder constituencies feel there is a regulatory vacuum in the United States.”