The SEC’s Final Climate Disclosure Rule: Interrogating Preemption and Coherence with Other Domestic Regimes

Now that the Securities and Exchange Commission (SEC) has released its final climate disclosure rule, attention has turned to the rule’s implementation and impact. This post is the third in a series of blogs that address specific legal features of the rule: Part One offered a summary of the final rule, and delved into the materiality […]

Now that the Securities and Exchange Commission (SEC) has released its final climate disclosure rule, attention has turned to the rule’s implementation and impact. This post is the third in a series of blogs that address specific legal features of the rule:

Part One offered a summary of the final rule, and delved into the materiality threshold that was added throughout the rule, including for greenhouse gas (GHG) emissions disclosure.

Part Two considered the future of the climate disclosure rule in the context of the SEC’s rulemaking process.

Part Three, below, explores preemption questions in the context of other domestic frameworks: California’s climate-disclosure laws and the Environmental Protection Agency (EPA)’s GHG emissions reporting regime.

Three Regimes for GHG Emissions Disclosure

The SEC climate disclosure rule requires three key areas of disclosure: (1) climate-related financial risks, (2) GHG emissions, and (3) climate-related targets or transition plans. (See Part One for a detailed description of those requirements.)

The SEC’s rule is not the only domestic framework for climate risk and emissions disclosure. California passed its own state disclosure regime last fall. The regime is set out in two bills – SB 253 and SB 261 – which, similar to the new SEC rule, require emissions disclosure and climate risk reporting. Governor Newsom signed the bills last October, making California the first state in the U.S. to mandate climate-related reporting from large companies. And it is not just any first state – California has the largest state economy in the US and, if it were a sovereign nation, it would be the fifth largest national economy in the world, making California’s laws extremely impactful. The California Air Resources Board (CARB) is still awaiting funding to craft the regulations needed to implement the laws, though it has indicated it will begin the process soon.

California’s GHG emissions disclosure bill, SB 253, is one of the fullest emissions disclosure rules of any jurisdiction in the world to date, going well beyond the SEC’s rule and the EU’s corporate sustainability requirements (the CSRD) in some respects. Both public and private companies doing business in California with annual revenues over $1 billion must report – publicly and annually – their global Scope 1, Scope 2, and Scope 3 GHG emissions. There is a verification requirement that becomes more stringent over time, with first limited assurance and then reasonable assurance, where the auditor must affirm that the information is materially correct. Reasonable assurance is proposed for 2030, providing corporations with several years to get their disclosures right.

The second California law, SB 261, requires companies to publish reports about their climate-related financial risks, and the plans the company has to reduce and manage those risks. This bill captures more companies, with a lower revenue threshold of over $500 million instead of $1 billion. Current estimates are that the law will impact over 10,000 companies, which will have to draft a report every two years, beginning January 1, 2026, and publish it on their own website. The report must detail the company’s “climate-related financial risk,” defined as: a material risk of harm to the company’s financial outcomes related to physical and transition risks of climate change. Covered companies must follow the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, which many global climate-related disclosure standards are based on, including the SEC’s.

The third disclosure regime at play in the United States comes from the Environmental Protection Agency (EPA) and focuses solely on GHG emissions. In 2008, Congress directed EPA to develop a rule to “require mandatory reporting of GHG emissions above appropriate thresholds in all sectors of the economy.” Pursuant to that authority, EPA created the Greenhouse Gas Reporting Program (GHGRP), which requires covered entities in 41 different source categories, including fuel and industrial gas suppliers, iron and steel manufacturers, and other large industrial facilities to report annually on their GHG emissions. EPA, as well as state and municipal governments, use the information received from reporting entities to inform the development and implementation of rules and regulations prescribed by the Clean Air Act (CAA). Notably, and unlike the SEC and California rules, EPA’s GHGRP is not directed at investors or consumers.

The GHGRP includes Scope 1 emissions, which must be reported at the individual facility level. These reports cover approximately 50% of the nation’s GHG emissions. The oil and gas industry must also report on the Scope 3 carbon dioxide emissions resulting from utilization of their products, regardless of whether the products are used within the U.S. An estimated 85-90% of the country’s GHG emissions are captured by the GHGRP. Notably excluded groups include agriculture, smaller emitters who do not reach the annual 25,000 metric tons of carbon dioxide-equivalent threshold requirement and are not otherwise required to report, and Scope 2 energy-related emissions. Annual reports are due by March 31st of each year, and the data is made publicly available (unless it qualifies for confidential treatment by law) through an online database.

The Preemption Challenges Facing California’s Regime

When the SEC adopted its new climate risk disclosure rule, dissenting Commissioner Peirce lobbed a thinly veiled threat, questioning whether the SEC’s rule would preempt California’s regime. A lawsuit has already been filed arguing (among other claims) that the GHGRP, which was established under the federal CAA, preempts the California regime. At the time the lawsuit was filed, the SEC had not finalized its climate disclosure rule, but opponents may eventually use it to make a similar preemption argument challenging the California regime.

However, the existence of federal regulations on the same subject as a state law does not mean that state law is necessarily preempted. Preemption of a state law arises under the Supremacy Clause in the Constitution. The basic idea underpinning preemption is that federal law may take precedence over state law where Congress intends for federal law to control. Mindful of federalist principles, however, courts find such intent where it is explicitly stated by Congress (express preemption) or apparent by operation of law (implied preemption). At issue here is a variety of implied preemption known as field preemption.

Field Preemption Fundamentals

When a federal regulatory scheme exists that is so pervasive and comprehensive, the federal government is deemed to imply that it has “occupied the field,” and state or local regulation in the same space will be preempted, even if there is no express statement that Congress intended to restrict state power. (See, e.g., Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947)). This is known as “field preemption.”

Establishing field preemption is no easy task. The courts have held that there is a “presumption against preemption,” meaning that “historic police powers of the States [are] not superseded by … Federal Act unless that [is] the clear and manifest purpose of Congress.” (Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992)). The “police powers” are the traditional basis for state legislation, which is the authority for the state to “provide for the public health, safety, and morals of [its citizens].” (Barnes v. Glen Theatre, 501 U.S. 560, 569 (1991)). This view, where historical powers are reserved to the states unless Congress clearly says otherwise, protects traditional values of federalism through what has been called “two mutually exclusive, reciprocally limiting fields of power—that of the national government and of the States.” However, more recently, this judicial view has transformed into “concurrent jurisdiction,” where the states and government work cooperatively to realize government purposes. The jurisprudence around preemption is “muddled” and fact specific; however, it is clear that the existence of a federal law in a given area does not necessarily mean that state law in the same area will be preempted, particularly where they can function simultaneously.

Distinct Authority and Aims

The SEC is tasked with “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.” Its authority comes from the Securities Act of 1933 and the Securities Exchange Act of 1934. Its new climate-related disclosure requirements are designed to provide investors with material information about the climate-related financial risks facing public companies. The SEC’s requirements have a different purpose from the state laws passed by California, which are focused on public health and environmental quality.

The California climate-related disclosure laws are codified in the California State Health and Safety Code, under Division 25.5, the California Global Warming Solutions Act of 2006 (Solutions Act). The goals of the Solutions Act include designing emissions reduction measures “in a manner that minimizes costs and maximizes benefits for California’s economy, improves and modernizes California’s energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic benefits for California, and complements the state’s efforts to improve air quality” as well as creating market-based compliance mechanisms to reduce GHG emissions and minimize harm to “state consumers, businesses, and the economy.”

Further, in Section 1 of SB 261, the legislature laid out the findings that necessitate creating a state disclosure regime based on the likely harm that will befall the state’s citizens, economy and environment due to climate change. “Climate change is affecting California’s communities and economy with impacts including wildfires, sea level rise, extreme weather events, extreme droughts, and associated impacts to the global economy … Failure of economic actors to adequately plan for and adapt to climate-related risks to their businesses and to the economy will result in significant harm to California, residents, and investors.. [this regime is needed to] ensure a sustainable, resilient, and prosperous future for our state.” In this way, the state has situated the law under its traditional police powers with an eye to protecting its citizens.

California’s disclosure rules will be implemented by the California Air Resources Board (CARB), which, per the Solutions Act, must “monitor[] and regulat[e] sources of emissions of greenhouse gases that cause global warming in order to reduce emissions of greenhouse gases.” The California laws do consider investors, as noted above, as the legislature connected the climate-related financial risk reporting requirements to the mandate to minimize risk to the economy and consumers, but that is not the sole focus of the regime.

The origins of EPA’s GHGRP date back to 2008, when Congress required EPA to draft and finalize a rule forcing reporting of GHG emissions “above appropriate thresholds in all sectors of the economy” under the EPA’s Clean Air Act authority. Congress gave EPA “broad authority” to mandate the GHG emissions reporting to generate data to carry out a wide variety of CAA provisions that require accurate emissions information to be effectively implemented. The reporting is not strictly designed to reduce GHG emissions, but rather to measure them and understand sources of pollution so they can be appropriately managed through federal programs that address air quality. The reporting is not designed to be used by investors to assess climate-related financial risk.

A Cohesive Function

The disclosure and reporting regimes designed by California, the SEC, and the EPA share a common subject matter: GHG emissions. And the California and SEC rules also both address climate-related financial risk. However, just because the laws and rules have similarities does not mean that the state laws will necessarily be preempted. If the state laws do not frustrate or otherwise prevent proper functioning of the federal laws, they are likely to be upheld in court, particularly when there is a history of federal and state regimes functioning in tandem, achieving separate, legitimate ends. So: do the SEC or EPA reporting regimes preclude California’s laws?

As discussed, the legal basis for California’s disclosure requirements differs from the SEC. The SEC’s regime is an investor protection program, and nowhere in the SEC’s rule does a stated goal of pollution control or GHG emission reduction appear. The SEC’s rule is designed to standardize national reporting of climate-related financial risks, including transition risks, which are increasingly recognized as a major threat to corporate financial security and therefore also a threat to investors in publicly traded companies. California’s laws seek similar emissions and climate-related risk information, but for the purposes of protecting California’s people, economy and environmental quality, and informing state policies. These are traditional police powers reserved to the state through the Tenth Amendment.

Moreover, federal and state securities regulations and corporate law have continually existed in a collaborative framework. States have “Blue Sky Laws” that provide for the sale of securities in each state. A uniform, suggested template for these laws exists, but it has not been adopted in all 50 states, which are entitled to their own regulations and state securities commission. A former SEC Commissioner noted that in terms of corporate law, “the advantages of reserving authority to the states are well-chronicled. Primary among these are the ability of states to respond to the needs of the constituents affected by their laws — including the companies organized under their laws and the investors in those companies — as well as the ability of states to function as ‘laboratories’ for innovation and experimentation.” A California-specific set of climate-related financial disclosures that function concurrently with the SEC’s regime is consistent with this tradition of allowing the states to regulate in the securities and corporate law fields.

Compared to EPA’s GHGRP, California’s laws are both narrower and broader, as they do not purport to control out-of-state pollution, and take both environmental and economic factors into account. The GHGRP does not require climate-related financial risk narrative reporting like the California laws. But perhaps most crucially from a preemption standpoint, the CAA is expressly designed to function in tandem with state regulation in the area. The preamble says: “air pollution prevention (that is, the reduction or elimination, through any measures, of the amount of pollutants produced or created at the source) and air pollution control at its source is the primary responsibility of States and local governments … and that Federal financial assistance and leadership is essential for the development of cooperative Federal, State, regional and local programs…” (42 U.S.C. § 7401).

Further, SB 253 expressly contemplates “minimizing duplication of effort and allow[ing] a reporting entity to submit to the emissions reporting organization reports prepared to meet other national and international reporting requirements.” The law explicitly references “any reports required by the federal government” in contemplation of the EPA’s GHGRP and the (then forthcoming) SEC rule. A similar provision also appears in SB 261. This is just the sort of concurrent jurisdiction that courts recognize and allow to exist under the bounds of preemption jurisprudence.

Indeed, the CAA already grants California special status to set higher bars than federal floors. California has a history as a “first mover” on environmental issues, in part due to the state’s pressing need for pollution controls. For this reason, the state was permitted to set its own emissions regulations for vehicles under the CAA, exemplifying how the two regimes can work cohesively. Any heightened requirement for climate-related risk and emissions disclosures in California beyond the EPA or SEC regimes can work in concert with those two regimes and serve to strengthen the overall climate disclosure picture in the United States.






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