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Following a 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC) on 6 March 2024 released the final version of “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” The rules standardize climate-related disclosures by public companies and in public offerings.
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements,” said SEC Chair Gary Gensler in a statement.
The SEC said the final rules are a response to investors’ demand for consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks.
“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” said Gensler.
So far, it seems that no one is completely happy with the rules. Democrats, even one on the SEC and those in Congress, have voiced concerns that the final rule is watered down and does not go far enough to hold companies accountable for the climate-related risks of their processes and products, while Republicans and business leaders feel it is government overreach and states, private companies, business groups, and environmental advocacy groups are filing lawsuits to stop it. A panel of judges from the Fifth Circuit Court of Appeals issued an order on 15 March 2024 that pauses the rule to allow litigation against it to play out.
Environmental groups appear to want it both ways. Unlike the industry groups and states, the Sierra Club and Sierra Club Foundation, represented by Earthjustice, are not challenging the SEC’s authority to enforce the final rule, but they are considering challenging the removal of key provisions related to Scope 3 emissions.
Before adopting the final rules, the commission considered more than 24,000 comment letters, including more than 4,500 unique letters, submitted in response to the proposed rules issued in March 2022.
What Companies Must Disclose
The 886 pages of the final rules require mid-sized and large companies to inform potential investors about greenhouse gas emissions directly caused by the business if that information would be likely to influence the decision to invest in that company. Publicly traded companies also must disclose the significant risks climate change can pose to the business. The final rule requires registrants to disclose:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook. If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities.
- Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices. Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks.
- Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
- Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would 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.
- Information about material Scope 1 emissions and/or Scope 2 emissions for large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted.
- An assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level for those required to disclose Scope 1 and/or Scope 2 emissions.
- The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements.
- The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements.
- If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.
Contentious Scope 3 Emissions Missing from Final Rule
Missing from the final rule are particularly contentious requirements found in the proposed rule regarding Scope 3 emissions, which required public companies to disclose emissions along their value chain, including assets along the supply chain not owned by the reporting entity, and even emissions created by the use and disposal of its products.
In a statement, the Sierra Club claims that 97% of investor comments supported the draft rule’s mandatory disclosure of Scope 3 emissions and complains the SEC “capitulated to industry pressure and meritless legal threats” by eliminating those requirements from the final rule. According to environmental groups, Scope 3 emissions account for the largest share of most companies’ greenhouse gas emissions.
The Sierra Club and Sierra Club Foundation on 13 March 2024 filed a lawsuit against the SEC in the U.S. Court of Appeals for the D.C. Circuit, alleging that by allowing companies to “selectively” report their greenhouse gas emissions, the SEC is falling short on its mandate to protect investors.
“While the SEC's final climate disclosure rule will provide investors with some much-needed information, the Commission's arbitrary decision to remove robust emissions disclosure requirements and other key elements from the proposed rule falls short of what the law requires,” said Sierra Club Executive Director Ben Jealous.
He added that through legal action, the Sierra Club and Sierra Club Foundation hope to ensure that investors “have the information they need to evaluate companies’ climate-related risks, make smart investment decisions, and protect their assets for decades to come.”
“The SEC is well within its authority and obligation to require more reliable information for investors,” said Senior Attorney Hana Vizcarra of Earthjustice, which filed the lawsuit on behalf of the organizations. She added, however, that the SEC “is condoning misleading and incomplete disclosures that open investors to risk by dropping the Scope 3 emissions disclosure requirements.”
In a statement published 6 March 2024, the American Chemistry Council, while acknowledging it will take some time to digest the 886 pages of the final rules package, said it is pleased that the SEC removed the proposed requirement that companies quantify and report on Scope 3 emissions. Stating its members supply critical chemistries used in the value chains of nearly every sector of the economy, ACC added that the Scope 3 requirement “posed unique challenges for the chemical sector while providing little value to investors.”
“ACC members already track Scope 1 and Scope 2 emissions through Responsible Care®️, our industry’s leading safety and sustainability performance initiative,” said the ACC. “Our members are engaged in a range of efforts through the market to track and report on material climate risk directly to value chain stakeholders or through third parties.”
Any new or expanded reporting requirements must provide information that is relevant, reliable, material to investors, and accessible to reporting companies, said the ACC, which added that it supports “a sensible path to a lower-emissions economy. We vigorously participated in this rulemaking and look forward to engaging on proposals with significant impacts for companies and sustainability efforts.”
Business, Industry, States Weigh In, File Lawsuits
“For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth, and legality of the SEC’s climate disclosure efforts,” said Tom Quaadman, Executive Vice President of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.
“While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors,” Quaadman said.
The Chamber is carefully reviewing the details of the rules and their legal underpinnings to understand the full impact. Quaadman added that the Chamber “will continue to use all the tools at our disposal, including litigation, if necessary, to prevent government overreach and preserve a competitive capital market system.”
To that end, on 14 March 2024, the Chamber filed a lawsuit in the U.S. Court of Appeals for the Fifth District with co-plaintiffs the Texas Association of Business and Longview Chamber of Commerce against the SEC, claiming the final climate disclosure rule "seriously erodes the reasonable investor standard of materiality and micromanages how companies make key determinations about materiality."
Bloomberg Law News reported 6 March 2024 that 10 states — Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Virginia, West Virginia, and Wyoming — have filed a Petition for Review in the 11th U.S. Circuit Court of Appeals to block the new rules. Louisiana, Mississippi, and Texas filed suit in the 5th U.S. Circuit Court of Appeals.
Louisiana Attorney General Liz Murrill called the rules unlawful regulatory overreach, adding, “Not only do these disclosure requirements fall outside of the (SEC’s) authority and violate the First Amendment, they also drive up business costs, which will then be passed on to the consumers.”
A group of trade associations for the financial management and investment community filed a lawsuit on 8 March 2024. Other trade associations are weighing their options, while individual companies have begun filing lawsuits as well.
The SEC contends that the new rules provide specificity on what companies must disclose and will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which the SEC hopes will help make them more reliable.
The adopting release is published on SEC.gov. The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.
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About the author: Sandy Smith, Senior Reporter, 3E, is an award-winning newspaper reporter and business-to-business journalist who has spent 20+ years researching and writing about EHS, regulatory compliance, and risk management and networking with EHS professionals. She is passionate about helping to build and maintain safe workplaces and promote workplace cultures that support EHS. She has presented at major conferences and has been interviewed about workplace safety and risk by The Wall Street Journal, CNN, and USA Today.
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