SEC Roll-Out of Climate Disclosure Rules Put On Hold Pending Ongoing Legal Challenges – What Does It Mean for SEC Filers?

Kelley Drye Client Advisory

Ending two years of anticipation over the final contours of its controversial foray into requiring a sweeping range of public company disclosures of business risks associated with climate change, the U.S. Securities and Exchange Commission (SEC) on March 6, 2024, published its long-awaited final rules on the topic, scaling them down in several respects from the Commission’s proposed version. Days after the final rules were issued, however, the Fifth Circuit Court of Appeals granted a petition for an administrative stay of the new rules. The Fifth Circuit case is one among multiple similar lawsuits launched by Attorneys General from several states, energy companies, and business and trade organizations. Though more legal challenges to the new rules are anticipated, companies should review their internal procedures and begin evaluating changes that may be necessary to comply with the new rule.

Companies subject to the rules will be required to provide climate-related information in their registration statements and in annual reports beginning as early as fiscal year 2025, with some requirements phased in over time. The final rules, titled The Enhancement and Standardization of Climate-Related Disclosures for Investors,” require certain companies to disclose information that the SEC determined is material to investors – ranging from greenhouse gases (GHGs) directly emitted by the company’s operations to the effects of climate-related conditions and events on the company’s business, results of operations, or financial condition. The SEC described the final rules as a continuation of its efforts to address investors’ need for consistent, comparable, and reliable information about the effects of climate-related risks on a company’s current and future financial performance and position, and how the company manages those risks.

Promulgated pursuant to the federal Securities Act and the Exchange Act, the final rules require subject companies to disclose a variety of material climate-related risks. In addition to disclosing how climate risks affect the company’s financial performance, the rules require subject companies to assess both actual and potential impacts of such risks on their strategy, business model, and outlook for continued operations and profitability. Required disclosures for these types of risk would have to include, for example, information about the company’s use of transition planning, an analysis of expected climate-related scenarios (like inundation, drought, and other severe weather impacts), and the rising cost of carbon use.

The rules also require oversight of climate-related risks by the board of directors, disclosure of the role played by management in assessing and managing the company’s material climate-related risks, and disclosure of the processes the company has in place for identifying, assessing, and managing material climate-related risks. Subject companies also would be required to disclose any material climate-related targets or goals, plans for achieving those targets or goals, and the company’s annual progress toward meeting them, and its material expenditures directly resulting from mitigation of climate-related risks, its disclosed transition plans, and disclosed targets or goals.

For larger companies, the rules go beyond the requirement to disclose direct GHG emissions associated with the company’s operations, to also include disclosure of indirect GHG emissions (e.g., GHG emissions arising from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a company) when those emissions are material.

The final rules also require the footnotes to a company’s financial statement to include information about expenditures incurred as a result of severe weather events, carbon offsets, and renewable energy credits used to achieve the company’s disclosed climate-related targets or goals, and any impact of severe weather events on estimates and assumptions the company used to produce the financial statement. While the required disclosures falling outside the financial statements are subject to a general set of principles known as management’s disclosure controls and procedures (“DCPs”), the financial statement disclosures are subject to a more exacting set of audit-related requirements, as well as management’s internal control over financial reporting (“ICFR”).

Lastly, the final rules provide a safe harbor to protect companies from liability for disclosures related to transition plans, scenario analysis, carbon pricing, and targets and goals. The safe harbor provides that all information required by the specified sections, except for historical facts, is considered a forward-looking statement for purposes of the Private Securities Litigation Reform Act.

It is not clear whether the legal challenges will result in a long-term stay of the new rules or outright invalidation. We will continue to monitor these developments. For assistance in determining if (and when) your company will be subject to the rules and, if so, how to plan and prepare for them, contact Steven Humphreys, a partner in our Parsippany, New Jersey office, or Courtney Kleshinski, a partner in our Chicago office. The contributions to this article by Zoe Makoul are greatly appreciated.