On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted much-anticipated final rules for climate-related disclosures (Final Rules). The Final Rules, adopted by a 3-2 vote along party lines, will significantly increase and standardize the climate-related disclosures required of public companies and differ meaningfully from the rules the SEC proposed in March 2022 (Proposed Rules).
The SEC has faced intense scrutiny and pushback on climate-related disclosures since the release of the Proposed Rules, which received over 24,000 comment letters, and the Final Rules are already subject to multiple challenges in court. On March 15, the 5th U.S. Circuit Court of Appeals granted a stay of the Final Rules, pending further judicial review, in response to one of these challenges. It remains to be seen how the Final Rules will be impacted by, or if they even survive, the continued scrutiny.
Summary of Final Rules
Since publishing the Proposed Rules, the SEC has emphasized that investors are demanding more comprehensive climate-related disclosures to help them make informed investment decisions. The adopting release issued with the Final Rules (Adopting Release) notes that the Final Rules address these demands by standardizing the climate-related disclosure provided by registrants, which will help investors more effectively and accurately compare registrants’ climate-related risks and their impact on registrants’ business strategies, results of operations and financial condition.
The Final Rules provide for the addition of a new subpart 1500 of Regulation S-K and a new Article 14 of Regulation S-X.
The new subpart 1500 of Regulation S-K will require disclosure of material climate-related risks and their material impacts on the registrant. For purposes of the Final Rules, “material” means “there is a substantial likelihood that a reasonable investor would consider [disclosure] important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the mix of information made available.” In the Adopting Release, the SEC emphasized that this is a fact-specific determination that includes both quantitative and qualitative considerations.
The new subpart also requires:
- the registrant’s activities, if any, to mitigate such risks, including the use of scenario analyses or internal carbon prices;
- disclosure of the roles of the registrant’s board of directors and management in assessing and managing material climate-related risks;
- information regarding any processes the registrant uses to assess or manage material climate-related risks;
- disclosure of any climate-related targets or goals that are material to the registrant’s business, results of operations or financial condition;
- disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions, when material, for accelerated filers and large accelerated filers; and
- an attestation report covering such Scope 1 and Scope 2 GHG emissions disclosures.
The new Article 14 of Regulation S-X will require:
- information regarding the capitalized costs, expenditures expensed, charges and losses incurred by the registrant due to severe weather events and other natural conditions (subject to a 1% and de minimis threshold), to be included in a note to the financial statements; and
- the capitalized costs, expenditures expensed and losses related to carbon offsets and renewable energy credits or certificates (RECs), if the registrant uses such offsets and RECs as a material aspect of its plan to achieve its disclosed climate-related targets and goals, to be included in a note to the financial statements.
Timing of Compliance
The Final Rules, which will go into effect 60 days after publication in the Federal Register, include a phased-in compliance scheme based on the registrant’s filing status:
| Compliance Dates* | ||||||
| Registrant Filer Type | Disclosure and Financial Statement Effects Audit | GHG Emissions/Assurance | Electronic Tagging | |||
| All Requirements (Unless Otherwise Noted in This Table) | Financial Statement Disclosures Relating to Material Expenditures | Scopes 1 and 2 GHG Emissions | Limited Assurance Attestation Report | Reasonable Assurance Attestation Report | Inline XBRL tagging for subpart 1500** Disclosures | |
| Large Accelerated Filer | Fiscal Year 2025 | Fiscal Year 2026 | Fiscal Year 2026 | Fiscal Year 2029 | Fiscal Year 2033 | Fiscal Year 2026 |
| Accelerated Filer (other than Smaller Reporting Company and Emerging Growth Company) | Fiscal Year 2026 | Fiscal Year 2027 | Fiscal Year 2028 | Fiscal Year 2031 | N/A | Fiscal Year 2026 |
| Smaller Reporting Company, Emerging Growth Company, and Non-Accelerated Filer | Fiscal Year 2027 | Fiscal Year 2028 | N/A | N/A | N/A | Fiscal Year 2027 |
| * Fiscal Year refers to any fiscal year beginning in the calendar year specified. ** Financial statement disclosures under Article 14 of Regulation S-X will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. | ||||||
Modifications from Proposed Rules
The SEC received over 24,000 comment letters in response to the Proposed Rules, the most ever received in connection with a single proposal, including over 4,500 unique letters. As expected, the letters ranged from vehement support of the proposal to calls to rescind it completely. Many of the substantive comments focused on the burdens the Proposed Rules would put on registrants and requested significant revisions in the final rules. As described in a previous McGuireWoods alert, the disclosure framework contemplated under the Proposed Rules would have dramatically increased the scope and complexity of public company disclosure requirements and required the substantial expansion of registrants’ internal controls, audit and governance functions.
While the SEC rejected the calls to totally rescind the proposal, the Final Rules meaningfully differ from the Proposed Rules and reflect some of the major concerns raised in the comment letters. The Adopting Release notes that the Final Rules were revised to reduce the risk that the climate disclosures would be less useful to investors but costly to registrants and increase the flexibility for registrants regarding the content and presentation of the disclosure. Notably, the Final Rules depart from the Proposed Rules by:
- removing the Scope 3 GHG emissions disclosure requirements;
- modifying the Scope 1 and Scope 2 GHG emissions disclosure requirements by exempting smaller reporting companies and emerging growth companies from this requirement and making this disclosure mandatory only for accelerated and large accelerated filers if the emissions are material to the registrant;
- removing the proposed requirement to disclose in the footnotes to the financial statements the impacts from severe weather events and other natural conditions;
- removing the proposed requirement to disclose the climate-related experience of board members, identify the specific board members responsible for climate-related risk and provide additional information on how the board of directors sets climate-related goals and targets and receives reports on climate-related risks;
- implementing a less-prescriptive approach to climate-related disclosure by allowing registrants to determine where to include the climate-related disclosure within certain of its SEC reports and registration statements;
- extending the Private Securities Litigation Reform Act safe harbor for forward-looking statements to disclosure relating to the registrant’s transition plans, scenario analysis, the use of internal carbon pricing and climate-related targets and goals; and
- increasing the phase-in period timelines for climate reporting, as described in the table above.
Implications for Registrants
As the SEC emphasized in the Adopting Release, many registrants already include some form of climate-related disclosure in their SEC filings. But the Final Rules mandate significant new disclosures and the reorganization and modification of any existing climate-related disclosure a registrant may currently provide. Registrants should use the transition period and the extended phase-in timelines to ensure they have the right procedures in place to adequately respond to the new disclosure requirements. Registrants should also consider:
- reviewing any climate-related disclosure the registrant currently provides;
- assessing existing reporting processes and controls for climate-related information;
- revising disclosure controls to address GHG emission disclosure requirements, if applicable to the registrant, and other mandated climate disclosures;
- reviewing the roles of management in managing climate risks and the board of directors in overseeing climate-related matters to determine if any corporate governance changes are necessary;
- assessing the materiality of the registrant’s Scope 1 and Scope 2 GHG emissions, if applicable, to prepare for disclosure obligations; and
- preparing for attestation requirements by connecting with attestation providers to review the new requirements and identify any additional services that will be required.
Registrants also should consider the new mandates under the Final Rules in the context of other climate disclosure regimes to which they may be subject, such as the ones recently implemented in the European Union (EU) or California. The EU’s Corporate Sustainability Reporting Directive (CSRD) is expected to apply to approximately 3,000 U.S. companies with annual revenues over a certain threshold in the EU. The CSRD requires disclosure of how a registrant’s business impacts the environment and includes requirements for Scopes 1, 2 and 3 GHG emissions disclosure.
Similarly, California Senate Bill 253, which became law in October 2023, requires companies doing business within the state of California beyond a certain annual revenue threshold to calculate and disclose Scope 3 GHG emissions (regardless of where the company is located and whether it is a private or public company). Significant uncertainty remains as to how these various reporting regimes will mesh and how registrants will navigate conflicting requirements.
Challenges to Final Rules
Given the intense opposition to the Proposed Rules, it is unsurprising that the Final Rules already face at least nine lawsuits to overturn the new disclosure requirements. The attorneys general of Louisiana, Texas and Mississippi have asked the 5th Circuit to overturn them, and the attorneys general of West Virginia and Georgia are leading a coalition of 10 Republican-led states seeking review of the final rules by the 8th Circuit. Members of the energy industry, Liberty Energy Inc. and Nomad Proppant Services LLC, also have sued in the 5th Circuit requesting review. The Final Rules are being challenged on multiple bases, including as unconstitutionally compelled speech under the First Amendment, as overreach of the SEC’s authority under the Administrative Procedures Act and the Chevron doctrine, and under the “major questions” doctrine.
In stark contrast to these challenges requesting reversal of the Final Rules, the Sierra Club and the Sierra Club Foundation sued in the D.C. Circuit, arguing that the disclosure requirements do not go far enough in giving investors adequate information about registrants’ exposure to climate risks. In particular, the lawsuit challenges the elimination of the Scope 3 GHG emissions disclosure requirements.
As of this writing, the Final Rules have been temporarily stayed by the 5th Circuit in connection with the suit filed by Liberty Energy and Nomad Proppant Services. The court issued a single-sentence order, omitting any rationale or explanation for the stay. The SEC has asked the Judicial Panel on Multidistrict Litigation to consolidate the suits in light of the number of pending challenges across the country. As a result, a lottery system will determine which circuit will hear and decide the challenges. If a circuit other than the 5th Circuit is selected, that court may decide to affirm, modify or revoke the 5th Circuit’s administrative stay while the other challenges are heard. It should be emphasized that the 5th Circuit’s stay does not determine the fate of the Final Rules or mean that the Final Rules will ultimately be overturned.
The Final Rules also may be subject to challenge under the Congressional Review Act (CRA). Although rarely used successfully, the CRA allows Congress to overturn rules issued by federal agencies. To overturn an agency rule under the CRA, a resolution of disapproval must pass both houses of Congress and be signed by the President. A CRA challenge of the Final Rules seems implausible since it will be difficult to muster the necessary support for the joint resolution or the votes needed to override President Biden’s likely veto. If the rule is overturned under the CRA, the SEC would be unable to repromulgate the Final Rules or substantially similar rules absent specific authorization from Congress.
Finally, the upcoming presidential election may impact the future of the Final Rules. Both the Proposed Rules and Final Rules are seen as a part of President Biden’s efforts to use federal agency rulemaking to address climate change. If elected, a new administration may change course and modify or roll back the scope of the Final Rules.
Conclusion
While the Final Rules scale back some of the disclosure requirements contemplated in the Proposed Rules, they will still drastically change the scope of a registrant’s climate-related disclosure and require significant consideration and resources. Although the Final Rules will technically go into effect 60 days after publication in the Federal Register, the result of the ongoing, and any future, litigation remains to be seen. The timing and scope of the requirements under the Final Rule may be dramatically impacted by such ligation, and registrants will need to remain abreast of new developments in the disclosure requirements and timelines to ensure compliance.