On 6 March 2023, by a 3-2 vote of the Commissioners split along party lines, the US Securities and Exchange Commission (SEC) adopted “The Enhancement and Standardization of Climate-Related Disclosures for Investors” final disclosure rules. No other SEC rulemaking in recent history has received as much attention as the climate-related disclosure rules. When preparing the final rules, the SEC had the onerous task of not only reviewing over 24,000 comment letters but crafting the final rules so that they could withstand the inevitable legal challenges while also trying to satisfy growing demands for climate-related disclosures.

The final rules seek to address the question of what climate-related disclosures, including climate-related risks faced by a company, should be publicly disclosed, a question that has been the subject of significant public attention and political controversy. The final rules seek to thread the needle between the two sides of this debate by adopting a pared-down set of final rules, which qualify many of the disclosure requirements by materiality while preserving the foundational idea that material climate-related disclosures are important to investors. Did the SEC successfully thread the needle with the final rules? Only time will tell, depending on the outcome of the legal challenges and whether investors ultimately receive useful information that is “consistent, comparable, and reliable” regarding a company’s climate-related disclosures that allows them to make more informed investment decisions.

Key Changes From the Proposed Rules

The final rules make several changes from the proposed rules, including:

• Qualifying several disclosure requirements by materiality;
• Eliminating a number of prescriptive disclosure requirements in favor of a more principles-based approach;
• Deleting the requirement to provide a description of board members’ climate-related expertise;
• Requiring only larger companies to disclose Scope 1 and Scope 2 GHG emissions and only when material;
• Eliminating the requirement to disclose Scope 3 GHG emissions for all companies; 
• Relaxing and extending the requirement to receive third-party assurance for GHG emissions disclosures; and
• Replacing line-item financial statement disclosure of financial impact metrics with disclosure of a discrete set of actual expenses that companies incur and can attribute to severe weather events and other natural conditions.

Disclosures Required by the Final Rules

The main thrust of the final rules was adding a new subpart 1500 to Regulation S-K and a new Article 14 to Regulation S-X, which will require public companies to disclose the following information:

Compliance Dates

The compliance dates for the disclosures set forth in the final rules are as follows:
 

_{* Item 1502(d)(2) of Regulation S-K requires a company to describe quantitatively and qualitatively the material expenditures incurred and material impacts on financial estimates and assumptions that, in management’s assessment, directly result from activities to mitigate or adapt to climate-related risks, including the adoption of new technologies or processes. Item 1502(e)(2) requires a company to include quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of any disclosed transition plan. Item 1504(c)(2) requires a company to include quantitative and qualitative disclosure of any material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or the actions taken to make progress toward meeting the target or goal.}

Legal Challenges

As noted above, the final rules are not without controversy. It will be expensive for companies to comply with the disclosures required under the final rules, and the SEC’s own estimates of the cost to comply with the final rules is in the hundreds of thousands of US dollars for a company. In addition, the final rules raise certain legal questions relating to the authority of the SEC to adopt the final rules, the process by which the final rules were adopted, and whether the proposed disclosure requirements are impermissible compelled speech under the First Amendment to the US Constitution.

The final rules are already subject to legal challenges. On 6 March (the day the final rules were adopted), 10 state attorneys general (AGs) from Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Virginia, West Virginia, and Wyoming filed a petition for review of the final rules in the US Court of Appeals for the Eleventh Circuit. As stated in the petition, the AGs argue that the final rules exceed the SEC’s authority and are “arbitrary, capricious, an abuse of discretion, and not in accordance with law.” Additionally, on 8 March, three AGs from Louisiana, Mississippi, and Texas challenged the final rules in the US Court of Appeals for the Fifth Circuit. It is likely that other industry groups representing a variety of stances with respect to the rule, such as the US Chamber of Commerce and the Sierra Club, may also file suit against the rule.

What Companies Should Do Now

While it is still uncertain if and when the final rules will become effective given the current and anticipated legal challenges, particularly in light of the success of recent challenges to the “Share Repurchase Disclosure Modernization” rules, companies should still prepare to provide the disclosures required by the final rules. Given the sheer magnitude of the disclosures required by the final rules, they will require significant data-gathering and preparation. Even though the final rules qualify many of the disclosures by materiality, companies will nonetheless need to undertake a materiality analysis which may be complex and uncertain given that these are new disclosure rules with no history or precedent that can be considered.

Create a timeline and responsibilities checklist for new disclosures required by the final rules: In order for a company to prepare to make disclosures under the final rules, it should prepare a timeline and responsibilities checklist for the new disclosures. By mapping out which disclosures a company is required to provide, the timeline for making those disclosures and the persons or management committees responsible for preparing those disclosures, it will begin to create the road map it needs to be ready to comply with the final rules if and when they become effective.

Review previous climate-related disclosures: If it has not already done so, a company should inventory its previous climate-related disclosures, both in and outside of its SEC filings. Given that several disclosure requirements in the final rules require a company to provide such disclosures if it has previously done so in an SEC filing, a company needs to understand what climate-related disclosures it has previously made in such filings. Additionally, given the qualification of many of the disclosures in the final rules by materiality, having a full inventory of all climate-related disclosures previously made can help a company as it performs a materiality assessment of its climate-related risks.
Review disclosure controls and procedures and internal controls over financial reporting: Given the new disclosures required by subpart 1500 of Regulation S-K and Article 14 of Regulation S-X, companies should begin to review their disclosure controls and procedures and their internal controls over financial reporting with respect to these new requirements.

Board oversight of and management’s role in assessing and managing climate-related risks: Given the new disclosure requirements regarding the board’s oversight of and management’s role in assessing and managing climate-related risks, a company should review its climate-related governance and consider what changes, if any, need to be made in the allocation of oversight responsibilities by the board and in its management’s roles and committees.

For large accelerated filers and accelerated filers, determine whether Scope 1 and Scope 2 emissions will be material: As noted above, Scope 1 and Scope 2 emissions disclosures are required for large accelerated filers and accelerated filers, if material. A critical step for these companies will be to perform their own assessment of their Scope 1 and Scope 2 emissions against their overall operations, which may require gathering information that companies currently do not collect.  The process of considering materiality, which is based on the established standards of whether information is material to a voting or investment decision or significantly alters the total mix of information, may be deceptively complex and subject to further guidance and interpretation.

Attestation providers: To the extent a company that is a large accelerated filer or an accelerated filer does not already have an attestation provider or has not previously sought to engage an attestation provider, it should begin a search. While the assurance requirements may seem far off, it will take time to hire an attestation provider, understand what information it needs to be able to provide the attestation, and prepare for such attestation. Considering the number of companies that will need to hire an attestation provider for their emissions disclosures, certain attestation providers may not be able to take on a new client as the compliance dates for the attestation requirements become closer.

Continue focusing on other climate-related disclosures: The final rules did not preempt any other climate-related disclosures such as those required by other states (e.g., California) or countries, including the European Union’s Corporate Sustainability Reporting Directive (CSRD). To the extent there is overlap in the disclosures required by these other rules, a company will be better situated to be able to provide the disclosures required under the final rules. However, companies subject to both the final rules and other climate-related disclosure requirements, such as those required by CSRD, should continue to prepare to comply with the disclosure requirements under both regulatory regimes.

Conclusion

Although it is uncertain if and when the final rules will go into effect given the current and future legal challenges to those rules, compliance with the final rules will require a significant investment of time and resources by companies. Companies should review the final rules and begin making their initial assessments on how best to comply with these new requirements and how these new requirements will impact their current and future disclosures.  

Our Capital Markets and Asset Management and Investment Funds lawyers will be pleased to discuss how the final rules impact our clients as they consider their own next steps.