United States: SEC Pauses Implementation Of Recently Announced Climate-Related Disclosure Requirements For Public Companies Amidst Consolidated Judicial Review

In light of recent challenges, the Securities and Exchange Commission (the "SEC" or the "Commission") has voluntarily delayed implementing its new rule, adopted on March 6, 2024, which includes a comprehensive package of climate disclosure rules that, after a phase in period, would require extensive climate–related disclosures by public companies in their periodic reports and registrations statements.

The Enhancement and Standardization of Climate-Related Disclosures for Investors (the "Final Rule"),¹ adopted by a 3-2 vote nearly two years after it was initially proposed (the "Proposed Rule"),² would require disclosure of material climate-related risks, financial impacts of severe weather events and, for certain registrants, greenhouse gas ("GHG") emissions if material. Though scaled back considerably from the Proposed Rule, the Final Rule would create significant compliance obligations for many registrants in what is the first federal disclosure requirement for public companies specifically related to climate. In the wake of the announcement of the Final Rule, several legal challenges have been brought against it, with some arguing that the Final Rule goes too far and others arguing that it does not go far enough. All of the various petitions have been consolidated and, by random lottery, assigned to the US Circuit Court of Appeals for the Eighth Circuit for review. The SEC announced a voluntary stay of the rules on April 4, 2024,³ explaining that the stay will allow for an orderly reconciliation of the various challenges.

Despite the delay and the challenges, public companies should familiarize themselves with the requirements of the Final Rule and take steps to prepare for compliance.

Disclosure of Climate-Related Risks

While many public companies already disclose some amount of climate-related information, the disclosure varies widely and, in many instances, does not allow for comparison of one company to another. The Final Rule is intended to enhance and standardize disclosures available in a registrant's public filings. According to SEC Chair Gary Gensler, the Final Rule will "benefit investors and issuers alike" by providing "investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements."⁴

The Final Rule adds Item 1500 to Regulation S-K and requires disclosures to be contained in the body of an annual report or registration statement in a section separately captioned "Climate-Related Disclosure.". These new disclosures will be qualitative in nature. The Final Rule also establishes a new Article 14 of Regulation S-X, requiring certain disaggregated financial statement metrics to be disclosed in a separate note to the audited financial statements in filings where the registrant is required to include the new Regulation S-K disclosure. Like the Proposed Rule, the Final Rule is based on the Task Force on Climate-related Financial Disclosure ("TCFD") reporting framework and the GHG Protocol emissions reporting standard, which are both frameworks widely used by companies around the world. For those companies already utilizing the TCFD and/or the GHG Protocol frameworks, compliance with the Final Rule may be more streamlined. In addition, after receipt and review of an unprecedented number of comments, letters and reports regarding the Proposed Rule, the Commission revised the Proposed Rule in notable ways intended to make it easier for public companies to comply.

Departures from the Proposed Rule

The Commission received close to 5,000 unique comment letters and nearly 20,000 form letters after the Proposed Rule was published. This large volume of public feedback led the Commission to make several meaningful revisions to the Proposed Rule in adopting the Final Rule. Perhaps most important is the revision requiring most disclosures to be made only if "material,"⁵ including disclosures relating to Scope 1 and Scope 2 GHG emissions, scenario analysis, and internal carbon pricing.

Several other changes from the Proposed Rule are important to highlight:

• Elimination of Scope 3 disclosure requirements;
• Extension of the timeline for compliance;
• Removal of Scope 1 and Scope 2 GHG emissions disclosure requirements for small reporting companies ("SRCs") and emerging growth companies ("EGCs");
• Deletion of terminology requiring future determinations, including "Climate-related opportunities" and "Global warming potential";
• Clarifications as to the instructions for foreign private issuers;
• Elimination of a "medium term" disclosure requirement; and
• General narrowing of disclosure requirements.

Qualitative Requirements

Despite the narrowing of the Proposed Rule, the Final Rule still includes significant, newly-required disclosures. Absent any further revisions stemming from the on-going review process, new Item 1500 of Regulation S-K will require the following disclosures:

• Any material climate-related risks identified that have had or are reasonably likely to have a material impact on a company's strategy, results of operations, or financial condition in the short-term and in the long-term;⁶
• Material impacts of any identified climate-related risks on the company's strategy, business model, and outlook, including, as applicable, any material impacts on a non-exclusive list of items;
• If any activities to mitigate or adapt to a material climate-related risk have been carried out by the company, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such activities;⁷
• A description of a transition plan to manage a material, climate-related transition risk, if one exists;⁸
• If using scenario analysis to determine that a climate-related risk is reasonably likely to have a material impact on a company's business, results of operations, or financial condition, a description of each scenario, including parameters, assumptions and analytical choices used;
• If using an internal carbon price is material to the evaluation and management of a material climate-related risk, certain material disclosures about such internal carbon price;⁹
• Board oversight of climate-related risks and any role by management in assessing and managing material climate-related risks;
• Processes for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any such processes are integrated into the company's overall risk management system or processes, as applicable;
• If a climate-related target or goal has materially affected or is reasonably likely to materially affect a company's business, results of operations, or financial condition, certain disclosures about such target or goal to allow an understanding of the impact;¹⁰
• If carbon offsets or renewable energy credits ("RECs") are a material component of climate-related targets or goals, certain disclosures of the amount of carbon offset or renewable energy generated, and the nature and source of the offsets or RECs;
• If a registrant is a large accelerated filer or an accelerated filer that is not otherwise exempt, and its Scope 1 and/or Scope 2 GHG emissions metrics are material, certain disclosure about those emissions, as discussed in more detail below; and
• Certain financial information regarding the impact of severe weather events and other natural conditions and information about carbon offsets and RECs, as discussed in more detail below.

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Footnotes

1. See Securities and Exchange Commission Release Nos. 33-11275; 34-99678 "The Enhancement and Standardization of Climate-Related Disclosures for Investors" (https://www.sec.gov/files/rules/final/2024/33-11275.pdf). Unless otherwise specified, quoted statements in this memorandum are taken from this release.

2. See Securities and Exchange Commission Release Nos. 33-11042; 34-94478 "The Enhancement and Standardization of Climate-Related Disclosures for Investors" (https://www.sec.gov/rules/proposed/2022/33-11042.pdf). For a summary of the Proposed Rule, see our previous client memo: https://www.cahill.com/publications/firm-memoranda/2022-04-06-sec-proposes-climate-related-disclosure-for-public-companies.

3. In the Matter of the Enhancement and Standardization of Climate-Related Disclosures for Investors, Order Issuing Stay (https://www.sec.gov/files/rules/other/2024/33-11280.pdf).

4. Statement on Final Rules Regarding Mandatory Climate Risk Disclosures, by Chair Gary Gensler (https://www.sec.gov/news/statement/gensler-statement-mandatory-climate-risk-disclosures-030624).

5. The Final Rule cites the following regarding the meaning of "material": "See 17 CFR 230.405 (definition of "material"); 17 CFR 240.12b-2 (definition of "material"). See also Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) (holding that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision; and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1977) to further explain that an omitted fact is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.")"

6. It is recommended that these disclosures be set forth on a non-exclusive list of items. The Final Rule defines "short-term" as within 12 months and "long-term" as 12 months and beyond.

7. This determination is made in management's best judgment.

8. Transition risks are defined as "the actual or potential negative impacts on a registrant's business, results of operations, or financial condition attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks." The Final Rule would also require "updated disclosures in the subsequent years describing the actions taken during the year under the plan, including how the actions have impacted the registrant's business, results of operations, or financial condition, and quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions."

9. The Final Rule would require disclosure of the price per metric ton of carbon dioxide equivalents ("CO2e"), if material, and the total price, including estimated changes over time, per Item 1502(a). The use of internal carbon pricing as a planning tool can help registrants identify climate-related risks and opportunities, incentivize them to drive energy efficiencies and reduce costs, quantify potential costs incurred if a carbon tax was put into effect, and guide capital investment decisions.

10. These 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." Updated disclosures would be required in subsequent years.