SEC Pauses Implementation Of Recently Announced Climate-Related Disclosure Requirements For Public Companies Amidst Consolidated Judicial Review – Corporate Governance

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.