SEC Issues Final Rules Requiring Enhanced Climate Disclosures

On March 6, 2024, in a 3-2 vote, and after receiving 24,000 public comments, the SEC adopted final rules to require registrants to disclose certain climate-related information. SEC.gov | SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors. The SEC proposed the rules almost two years ago. See SEC Issues Draft Rule Requiring Enhanced Climate Disclosures | LP (lplegal.com). Pending legal challenges (see below), the rules will become effective 60 days after publication in the Federal Register, and compliance for the largest filers will begin in fiscal year 2026. The rules require the disclosures in registration statements, annual reports, and other documents filed with the SEC, and require electronically tagged climate disclosures in the SEC format (Inline XBRL) for submitting and accessing financial statement information.

The final rules require registrants to disclose, among other things, material climate-related risks on the registrant’s business strategy, operation, financial condition, business model, and outlook. They also require disclosure of any measures taken to mitigate climate-related risks, including expenditures incurred and financial impacts of such measures. The rules direct disclosure of any oversight by the board and the role of management in assessing, identifying, and managing climate-related risks, and the processes for identifying such risks. The final rules require information about any material climate-related targets or goals to reduce greenhouse gas (GHG) emissions. They also mandate disclosure of material financial impacts caused by severe weather events, such as hurricanes, flooding, droughts, wildfire, and rising ocean levels. Additionally, the new regulations require disclosure of costs related to carbon offsets and renewable energy credits, if used to achieve the registrant’s disclosed targets or goals to reduce GHG emissions.

Beginning with the largest companies in fiscal year 2026, registrants must disclose both their (a) material direct GHG emissions (Scope I emissions) and (b) material indirect GHG emissions from purchased electricity and other forms of energy (Scope 2 emissions). Recognizing the current difficulty in calculating direct and indirect GHG emissions, the rules initially require companies to file the report at a “limited” assurance level, and then, after a transition period, to file the report at a “reasonable” assurance level. In a major concession to the regulated community, in the final rules, the SEC removed the requirement in the draft rules for registrants to disclose material upstream and downstream GHG emissions (Scope 3 emissions). Scope 3 emissions include emissions caused by suppliers and users of a company’s products. An example of Scope 3 emissions for an automaker would be the GHG emissions caused by drivers of the manufacturer’s cars. The new rules also scaled back the proposed rules by exempting disclosure of GHG emissions by smaller companies and requiring filers to disclose only their material emissions.

Within hours of SEC’s announcement that it had adopted its final rules, ten states filed a petition to review the rules against the SEC in the United States Court of Appeals for the Eleventh Circuit, asserting that the new rule “exceeds that agency’s statutory authority and otherwise is arbitrary and capricious, an abuse of discretion and not in accordance with law.” Two other states, two energy industry suppliers, and the U.S. Chamber of Commerce have also challenged the SEC rules in separate suits filed in the United States Court of Appeals for the Fifth Circuit. In response to the energy industry suppliers’ motion, on March 15, 2024, the Fifth Circuit issued a one-sentence order granting an administrative stay of the regulations. The Sierra Club filed suit in the D.C. Circuit Court of Appeals, expressing concern about the removal from the proposed rule of the requirement to disclose Scope 3 GHG emissions, and that companies must disclose only “material” Scope 1 and Scope 2 emissions. See Sierra Club, Earthjustice Lawsuit Challenges SEC’s Weakened Climate Risk Disclosure Rule | Sierra Club. In response to a total of nine suits filed thus far in six jurisdictions, on March 21, 2024, the proceedings were consolidated into a single case in the Eighth Circuit. On April 4, 2024, the SEC voluntarily issued an order staying the rules pending completion of judicial review by the Eighth Circuit.

Given the pending and anticipated litigation, it is likely that the 60-day effective date of the SEC’s final climate disclosure rules will be substantially delayed. Nonetheless, to the extent that public companies have been waiting in the wings for the final rules, they should take action now. Registrants should institute a formal program to calculate their direct and indirect GHG emissions and address each of the other required disclosures outlined in the final rule. For more information, please contact James Brusslan.