On March 6, 2024, the Securities and Exchange Commission (“SEC”) adopted amendments to the disclosure rules under the Securities Act of 1933 and the Securities Exchange Act of 1934. Although the final rule is a scaled-back version of the proposal published on March 21, 2022, the new rule will require many publicly traded companies to disclose both their direct and indirect emissions, also known as “Scope 1” and “Scope 2” emissions, provided the emissions are material. Companies must also disclose to investors their climate-related risks, including information about financial harm caused by severe weather events and other natural events. The new rule will be phased in beginning with the filing of annual reports for the year ending December 31, 2025.

Of significance to the business community is the SEC’s decision to exclude the requirement to report Scope 3 emissions which would have required businesses to disclose all indirect greenhouse gas (“GHG”) emissions not otherwise included in a registrant’s Scope 2 emissions that occur in the upstream and downstream activities of the registrant’s value chain. In deciding to eliminate the requirement to report Scope 3 emissions, the SEC observed that “Scope 3 emissions typically result from the activities of third parties in a registrant’s value chain and, thus, collecting the appropriate data and calculating these emissions would potentially be more difficult than for Scopes 1 and 2 emissions.”

Responses to the Rule

The new rule received some initial criticism from both sides of the political spectrum. West Virginia Attorney General Patrick Morrisey announced that a coalition of 10 states intend to file a legal challenge to the new rule, based upon the premise that the SEC’s rule “exceeds the agency’s statutory authority and is arbitrary, capricious, an abuse of discretion, and not in accordance with the law.”^[1] The U.S. Chamber of Commerce has also threatened litigation. Alternatively, environmental advocacy groups, including the Sierra Club and Earthjustice, announced that they may challenge the SEC’s “arbitrary removal” of “Scope 3” emissions, referring to the SEC’s initial plan to require the disclosure of emissions from a company’s supply chain and the use of its products.^[2] The business community has likewise voiced its concerns that the rule will significantly increase costs, and will subject companies to litigation threats in regard to whether the financial materiality of their Scope 1 and 2 emissions have been properly reported.

Public Company Exemptions and Closer Evaluation of Risk

Not all companies will be required to provide the new SEC climate-related disclosures. Smaller reporting companies, emerging growth companies, and nonaccelerated filers are exempt from the requirement to provide GHG emission disclosures and related attestation. Therefore, it is important for companies to evaluate the new disclosure rule to assess applicable reporting requirements.

Climate-related disclosures are not new. The Governance & Accountability Institute found that 98 percent of large-cap companies in the S&P 500 published sustainability reports and 90 percent of companies in the total Russell 100 Index published reports in 2022.^[3] Thus, for some large companies, climate disclosures are not new, but the recent rule will require a closer evaluation of risks in regard to financial materiality. This detailed assessment of risks and emissions will require the expenditure of added costs.

Conclusion

Two initial thoughts are evident following the rule’s issuance. First, given the controversy surrounding the SEC’s rule, and the two-year lead time in which both the business community and environmental advocacy groups have voiced their legal positions as to the content of the rule, as well as the SEC’s legal mandate to issue the rule, litigation is inevitable. Second, the business community will need to evaluate their current SEC disclosures involving climate-related risks to determine how the new rule will impact existing internal processes for the identification, assessment, and management of material climate-related risks.

^[1] See Petition for Review, ago.wv.gov/Documents/SEC%20Climate%20Disclosure%20Petition%20for%20Review.pdf (last visited March 7, 2024).

^[2] See Sierra Club and Earthjustice Considering Legal Action in Response to the Rule, Sierra Club (Marh 6, 2024), SEC Climate Disclosure Rule Represents Important Progress, But Falls Short on Key Metrics of Financial Risk | Sierra Club.

^[3] See G&A’s 2023 Sustainability Reporting In Focus, www.ga-institute.com/research/ga-research-directory/sustainability-reporting-trends/2023-sustainability-reporting-in-focus.html (last visited March 7, 2024).