SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors

March 08, 2024

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(U.S. Securities and Exchange Commission) The Securities and Exchange Commission today adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” said SEC Chair Gary Gensler. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”

Chair Gensler added, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Specifically, the final rules will require a registrant to disclose:

Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Before adopting the final rules, the Commission considered more than 24,000 comment letters, including more than 4,500 unique letters, submitted in response to the rules’ proposing release issued in March 2022.

The adopting release is published on SEC.gov and will be published in the Federal Register. The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status. READ MORE

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Excerpt from E&E News: The landmark Securities and Exchange Commission rule — approved last week by a 3-2 vote — drew immediate legal challenges from Republican-led states and energy companies.

The challenges came despite the SEC’s move to dramatically roll back its original proposal, a revision that included dropping a requirement that some companies report emissions associated with their customers and sprawling supply chains.

“The SEC tried hard to mollify corporate America on how expensive this would be, but there are enough companies and enough states who hate the idea of a capital markets regulator taking on a climate role,” said David Zaring, a professor at the University of Pennsylvania’s Wharton School of Business.

It’s not just corporations that are mad. The SEC’s step back has also prompted environmentalists to threaten to sue the agency over what they called an “arbitrary removal” of key measures from the rule.

“The definition of a compromise is that each side is equally unhappy,” said Steve O’Day, partner and head of the environmental law, energy and sustainability practices at the firm Smith, Gambrell & Russell. “And the fact that both sides are unhappy increases the likelihood of litigation.”

The SEC’s legal challengers have yet to detail their issues with the nearly 900-page rule, but the industry is widely expected to invoke the “major questions” doctrine, a legal theory championed by conservatives that says Congress must clearly provide permission for an agency action of political and economic significance.

The Supreme Court cited the doctrine by name for the first time in West Virginia v. EPA, a landmark 2022 ruling that curbed EPA’s ability to regulate greenhouse gas emissions from coal-fired power plants. The decision didn’t specify how or when a regulation may qualify as “major,” but conservative groups have embraced the doctrine to go after the Biden administration’s most ambitious climate initiatives.

“The argument will be that the SEC has gone outside of its delegated mission by seeking to do something about climate change,” O’Day said.

O’Day said that the SEC was created after the 1929 stock market collapse to protect investors. “Part of protecting investors is providing them with information,” he said, “so they’ve got a good argument to defend the rule.”

But the SEC may have a difficult time making that argument in court, Zaring said. Although the SEC says it has required environmental disclosures in the past, he said, the rule marks the first time it has tried to require companies to report on their environmental impact.

“The SEC’s not an environmental regulator,” Zaring said. “It’s charged with investor protection.”

West Virginia Attorney General Patrick Morrisey, who announced a multistate lawsuit against the rule just hours after the SEC vote, said the major questions doctrine that he successfully invoked in West Virginia v. EPA will be relevant to the SEC challenge.

The rule, said Morrisey, a Republican, is “not tethered to clear statutory authority.”

Morrisey characterized the SEC rule as an attack on the energy industry. Two fracking companies — Liberty Energy and Nomad Proppant Services — have already filed their own lawsuit against the regulation.

Where will the lawsuits land?

It’s unclear which court will hear lawsuits over the SEC’s new rule.

Liberty Energy and Nomad Proppant Services filed in the 5th U.S. Circuit Court of Appeals, which is viewed as one of the nation’s most politically conservative courts. Louisiana, Texas and Mississippi filed a lawsuit there as well. Morrisey and nine other state attorneys went to the conservative-leaning 11th U.S. Circuit Court of Appeals.

The venue for the cases will be randomly chosen between any federal appeals court where a petition is filed over the coming days. READ MORE

Excerpt from Associated Press: The U.S. Securities and Exchange Commission is pausing the implementation of its new climate disclosure rule while it defends the regulation in court.

Wall Street’s top regulator voted in March on the final rule, which requires some public companies in the U.S. to report their greenhouse gas emissions and climate risks. The measure faced legal challenges almost immediately.

The SEC said Thursday it had stayed the rule in part to avoid regulatory uncertainty for companies that might have been subject to the rule while litigation against it proceeds. The rule is pending review in the U.S. Court of Appeals for the Eighth Circuit.

The rule adopted in early March was watered down from what the nation’s top financial regulator had proposed two years ago, after it faced lobbying and criticism from business and trade groups and Republican-led states that argued the SEC had overstepped its mandate. But that didn’t stave off lawsuits. After the final rule was approved, environmental groups including the Sierra Club also sued, saying the SEC’s weakened rule did not go far enough.

The SEC said it would continue “vigorously defending” the validity of its climate rule and believes that it had acted within its authority to require disclosures important to investors. A stay would “allow the court of appeals to focus on deciding the merits,” the SEC said in a statement.

Michael Littenberg, an attorney with Ropes & Gray and the head of the firm’s environmental, social and governance or ESG division, said the stay was unlikely to be a factor in the ultimate fate of the SEC’s regulation.

And while some companies may delay efforts to comply with the SEC’s measure, “it’s not pencils down on climate disclosure more generally,” Littenberg said.

Companies are already collecting data and climate-related information to comply with similar rules in other jurisdictions, such as California and the European Union, which recently moved ahead with their own disclosure requirements. California’s rule has also been challenged in court.

Jon Solorzano, an attorney with Vinson & Elkins who advises companies on ESG topics, said the uncertainty surrounding the SEC’s rule presents more challenges for smaller companies than large ones.

“That’s where it gets tricky because they don’t have unlimited resources,” Solorzano said. “This is at a genuine cost to their business ... how much they should be investing in something that may or may not come to pass.”

In addition to reporting greenhouse gas emissions, the SEC rule requires U.S.-listed companies to publicly report their climate-related risks and information about their plans to transition to a low-carbon economy.

The agency dropped a requirement that would have had companies report some indirect emissions known as Scope 3. Those don’t come from a company or its operations, but happen along its supply chain — for example, in the production of the fabrics that make a retailer’s clothing.

The SEC’s reporting requirements would not have taken effect until 2026. READ MORE