The SEC’s Climate Disclosure Rules Have Been Stayed Temporarily, but Companies Should Not Delay Planning and Preparing For Their Implementation

Photo of Viggo C. Fish
Viggo C. Fish
Counsel, Administrative Law Department
Published: New Hampshire Business Review
May 24, 2024

On March 6, 2024, the United States Securities and Exchange Commission (SEC) issued its final climate rules, entitled “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (Climate Rules), that will require certain public companies to make disclosures about their climate-related risks and greenhouse gas emissions.

The Climate Rules are not designed or intended to compel businesses, directly, to take action to address the effects of climate change. Rather, the rules recognize that climate-related risks, and the manner in which companies respond to or address such risks, have the potential to significantly affect companies’ operations, governance, and financial position. The rules are, therefore, intended to ensure that investors and the investment community have access to information about climate-related risks and their impact on businesses and that such information is disclosed in a consistent, comparable, and reliable manner.  To that end, the Climate Rules require public companies to provide certain information about climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, companies’ strategy, operations, or financial condition.  The Climate Rules also require certain larger companies to disclose their direct and indirect greenhouse gas emissions if such emissions are material in an investment context.

The Climate Rules came nearly two years after the SEC announced its initial rule proposal and following the receipt by the agency of over 4,500 unique comment letters and over 18,000 form letters from a range of stakeholders.  The Climate Rules are, in a number of key ways, less demanding and less encompassing than the SEC’s initially proposed rules but, if implemented, would still impose significant disclosure requirements on public companies that must file annual reports and registrations statements with the SEC.

A notable change from the SEC’s initial proposal is the removal of the requirement for companies to report their so-called Class 3 emissions – emissions produced along a company’s upstream and downstream value and supply chains that could represent a large portion of indirect emissions associated with its business operations.  Further, in the Climate Rules the SEC introduced a “materiality” qualifier, requiring disclosure only of information that companies deem “material”, i.e., whether the information is important in the context of investors’ investment and voting decisions about a particular company.  Other notable changes in the Climate Rules are the addition of accommodations and exemptions for smaller reporting companies and emerging growth companies as well as extension of safe harbors to specific aspects of a company’s disclosures as “forward-looking statements” that offer liability protections related to financial projections and forecasts.

Yet, despite the scaled back reach of the Climate Rules – that is generally viewed as “softening” the requirements – multiple legal challenges to the rules have been filed, some asserting the Climate Rules overreach the SEC’s authority while others argue the rules do not go far enough. On March 21, 2024, the U.S. Joint Panel on Multidistrict Litigation issued an order that consolidated nine petitions filed in separate federal jurisdictions in the U.S. Court of Appeals for the Eight Circuit.  Following the consolidation of legal challenges, on April 4, 2024 the SEC issued an order staying the effectiveness of the Climate Rules to allow for judicial resolution of the legal challenges. The SEC’s decision to stay the implementation of the Climate Rules provides businesses that may be subject to the new disclosure requirements some immediate benefit.  For example, the SEC’s stay avoids the imposition of compliance obligations before a judicial determination of the validity of the Climate Rules is made.  Still, the Climate Rules in some form are likely to survive and companies likely should not delay their assessment of the new requirements and their planning and preparation to comply with those requirements.

Companies should begin to consider the potential effect of the following impending obligations to manage and report climate-related risks:

  • Companies will have to disclose material climate-related risks that have or are reasonably likely to have a material impact on the company as well as the actual and potential material impacts of any identified climate-related risks.
  • Companies will have to provide qualitative and quantitative descriptions of material expenditures incurred and material impacts on financial estimates and assumptions that, in the company’s assessment, directly result from activities the company undertook to mitigate or adapt to a material climate-related risk
  • Companies will have to disclose the oversight and governance of climate-related risks by their board and management.
  • Certain larger companies that are not exempted under the Climate Rules will be required to comprehensively disclose both direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions, aggregated in terms of CO2e, beginning as early as the beginning of the 2026 financial year, if their emissions are material. Companies subject to this provision are required to include an attestation report.
  • Companies will have to disclose the financial statement effects of severe weather events and other natural conditions including costs and losses, including costs and losses related to carbon offsets and renewable energy credits if material to the company’s plans to achieve climate-related tartes and goals.

In light of the complexity and reach of the Climate Rules, and the uncertainty of the outcome of legal challenges to the rules, companies that may be subject to the rules will likely want to initiate a careful evaluation of the potential effect of the implementation of the rules, and begin their preparations, early.  Companies will need to determine if they will be subject to the new rules, what requirements in the rules will apply to them, and what actions are needed to comply.  For many companies, the time needed to prepare for the Climate Rules’ implementation may be significant.