- The US Supreme Court’s ultra-conservative majority spells bad news for climate action, on which Congress has struggled to make progress.
- There are major concerns for the fate of the US’s proposed climate reporting rule considering the court’s recent judgements.
- The latest developments place the burden squarely on the financial sector to lead the way on climate action, says environmentalist Bill McKibben.
US climate policy advocates have had a tough time in recent months: there was the latest in a string of failures by Congress to reach agreement on a climate bill last week, following the Supreme Court’s late June ruling to limit the Environmental Protection Agency’s (EPA) ability to regulate carbon dioxide emissions from power plants.
And plenty more cases along these lines are in the pipeline – amid growing political opposition to the climate and indeed wider sustainability agenda in the US at both federal and state level, with major implications for investors and financiers.
Both of the latest developments have made headlines around the world, and each in its own way demonstrates the extraordinary power held by six ultra-conservative and unelected justices who are set to sit on the nine-member court for life.
These decisions, particularly the court’s latest big ruling in West Virginia vs EPA on 30 June, have worrying implications for climate-conscious investors that have long sought more non-financial information – most notably that related to environmental risks – from the companies they hold stakes in.
The Securities and Exchange Commission (SEC) plans to make such disclosure mandatory for corporates. But criticism of its proposal is mounting, and it looks increasingly likely that it will end up being considered by the Supreme Court.
All of this makes it more critical than ever that investors and civil society continue to pressure banks, asset managers and companies to be more progressive on climate, though financial executives were largely unwilling to discuss the issue even privately, say experts.
“We need to press Wall Street at least as hard as Washington,” says Bill McKibben, a US-based environmental activist and author. “Political power has been concentrated in the red states now and that makes action hard, but financial power is in blue cities and states, and if we can force the banks and big asset managers to stop lending for fossil fuel expansion, it will at least help.”
Precedent problematic for climate action
In West Virginia vs EPA, the court’s ruling was that the agency lacked the legal authority under the Clean Air Act to force an aggregate shift towards less carbon-intensive electricity generation systems. The rationale for the decision could have major implications for the SEC’s climate reporting rule.
However, the reasoning is “so fundamentally flawed that there is no other way to see the opinion than as a blatant exercise of political power”, says environmental litigator Durwood Zaelke, president and founder of the Institute for Governance and Sustainable Development in Washington, DC.
That reasoning hinged on a new concept, the ‘major questions’ doctrine. This dictates that Congress must be exact when authorising agency action in certain extraordinary cases, and the court has invoked it for the first time in the West Virginia case. The vagueness of this concept is a big concern for supporters of federal regulation across the country.
Many lawyers say the SEC has a solid case. Climate risk has long been recognised by lawyers, financial firms and regulators as both material to investors and a financial risk, so providing more information on it sits firmly within the regulator’s remit of protecting investors.
But these judges have already shown that they are not playing by the established rules, says Zaelke. “If we pretend this is a battle of legal reasoning, we’re missing the point. We are seeing such disrespect for the rule of law that if the court wants to continue its political activism and strike down the SEC rule, it’ll find a way.”
McKibben seconded this in emailed comments to Capital Monitor: “The SEC has authority to regulate against risks to markets, and clearly there’s none bigger than a rapidly changing climate – but the court is on a rampage and does not seem to be willing to let law get in its way.”
If the SEC’s climate reporting rule were to be struck down, it could put US companies at a competitive disadvantage compared to dozens of other countries that are already mandating greenhouse gas disclosure.
“The US is still the world’s largest capital market, and when the regulator of the world’s largest capital market is unable to implement the very baseline of ESG regulation – which a lot of companies are already disclosing voluntarily – that’s a problem,” says a sustainability-focused New York-based fund manager.
The context around the EPA ruling
It is important to consider the broader political context for the current Supreme Court. Democrats have the illusion of control – a small majority – in both Congress and the Senate. But West Virginia’s Democrat senator, Joe Manchin, has refused to make any concessions on federal climate action, thereby paralysing the government and preventing the president from executing a cornerstone of his campaign: progressive climate action.
So while the Supreme Court rules that regulation should come from Congress – not regulators – in 2010 it gave companies the power to “game our political system at will… [which] explains, in part, why Congress has not passed a real climate bill in decades”, writes McKibben.
With the country trapped in this cycle, the Supreme Court is able to continue ruling by minority, casting judgements that are unambiguously unpopular with voters, without the usual fear of judges losing their seats.
Investors – whom the SEC has a mandate to protect – overwhelmingly support the watchdog’s disclosure proposal, saying it would streamline how they use ESG data and allow them to better manage risk. Big funds, such as the California State Teachers’ Retirement System, have repeatedly and publicly stated their support for it.
That is not to mention the fact that most Americans think their government should do more to tackle climate change, just as most support access to legal abortion despite the overturning of Roe vs Wade last month.
For their part, corporates have presented a more mixed argument on the reporting proposal, with some in support, but the US’s two biggest business associations are requesting that the rule be scaled back.
Supreme Court set to double down
Many have suggested expanding the size of the court to address the balance of political views. However, Biden has not been very supportive of the idea. He prefers executive orders, with which plenty can be done, says Zaelke. Yet in lieu of real federal action, responsibility is punted back to the states that take climate change seriously.
There are plenty more cases making their way to the Supreme Court that could, like the recent EPA ruling, have major environmental implications. One proposal would allow the federal government to limit tailpipe emissions from cars and trucks, and another would require it to consider the financial implications of the climate crisis when approving or rejecting a new pipeline.
The concern now is that the court has made clear it is not playing by the usual rules, suggesting that the usual practices will not work in response.
This will likely exacerbate regulatory fragmentation – already a hindrance for sustainability professionals’ ability to do their job efficiently – but may be better than nothing. California, the world’s sixth-largest economy, has passed an act in mid-July requiring big companies to disclose their emissions.
Ultra-conservatives on the Supreme Court may do what they can to slow things down, but numerous studies have shown that the economics of the climate crisis will not change – though ideology appears to have taken precedence over them now.
Companies that do not adequately disclose or consider climate risk are doing their shareholders and clients a disservice. In an environment as litigation-happy as the US (see chart above), that’s a serious business risk of its own.
Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.
