New rules reflect significant concessions in response to public comments, but compliance will require careful consideration and significant investment by SEC registrants.

• Scope 3 emissions disclosure not required for any registrant
• Scope 1 and Scope 2 emissions disclosure required only by large accelerated filers and accelerated filers and only if material; Third-party assurance requirements scaled over next decade
• Climate-related disclosure requirements qualified based on materiality, including disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price

On March 6, 2024, the U.S. Securities and Exchange Commission (the “SEC”) adopted final rules mandating climate-related disclosure by all SEC registrants, captioned “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Final Rules”).¹

The Final Rules scale back disclosure requirements and extend phase-in periods as compared with the original rule proposal on March 21, 2022 (the “Proposed Rules”). Per the SEC’s adopting release accompanying the Final Rules (the “Adopting Release”), these changes were tailored to be responsive to public comments received during the rulemaking process from reporting companies, industry organizations, political leaders, and others. The deviations from the Proposed Rules also likely reflect the SEC’s desire to insulate the Final Rules against anticipated legal challenges in federal court by both opponents and proponents of mandatory climate-related disclosures. Only a few hours following their adoption, a coalition of 10 states announced plans to challenge the Final Rules in the U.S. Court of Appeals for the 11th Circuit, asserting that the Final Rules “exceed[] the [SEC’s] statutory authority and otherwise [are] arbitrary, capricious, an abuse of discretion, and not in accordance with law.”² Moreover, the Supreme Court appears poised to alter longstanding precedent in Chevron v. Natural Resources Defense Council granting deference to agencies’ rulemaking and enforcement powers, which would enhance the likelihood of success of challenges to the Final Rules.³

Narrow approval by a deeply-divided Commission

As at the proposal stage, the Commissioners split 3-2 across party lines in voting to adopt the Final Rules, albeit subject to significant reservations from one of the Commissioners voting in favor.

Democratic Commissioners Jaime Lizárraga and Caroline A. Crenshaw joined Chair Gary Gensler in supporting adoption of the Final Rules, delivering concurring statements that encouraged the SEC and its Staff to expand the rules in the future, including by requiring issuers to disclose Scope 3 emissions and by eliminating the materiality threshold for Scope 1 and Scope 2 emissions disclosure. Commissioner Lizárraga was full-throated in his support for the Final Rules, praising the SEC’s “careful analysis of stakeholder input” in adopting the various departures from the original proposal.⁴ By contrast, while strongly supporting the proposition that the SEC has “clear legal authority” to adopt the Final Rules, Commissioner Crenshaw stated that the Final Rules do “not have my unencumbered support,” faulting the Final Rules for failure to include “a more robust GHG emissions reporting requirement and…transition-related expenditure disclosure in the financial statements.”⁵ In particular, Commissioner Crenshaw opposed the exclusion of Scope 3 emissions from the Final Rules, describing Scope 3 emissions as “an invaluable metric for investors” and a “comparable, quantitative metric that allows investors to measure that risk across companies, sectors, and their portfolios.”⁶ Looking forward, Crenshaw encouraged the Commission to consider additional “guidance, [Section] 21A reports, FAQs, or other Commission actions… should [the SEC] find that requiring materiality qualifiers in Scope 1 and Scope 2 GHG emissions reporting, or other changes from the proposal, result in insufficient information to adequately assess climate-related risk.”⁷

By contrast, Republican Commissioners Hester M. Peirce and Mark T. Uyeda delivered pointed dissenting statements and closely questioned the SEC Staff regarding a variety of interpretation and implementation issues. Significantly, Commissioner Peirce observed that “the final rule differs quite dramatically from the proposal, both by excluding major provisions and including new rule elements,” suggesting that the proposal should have been re-proposed rather than finalized.⁸ Her conclusion—that “this approach does not give fair notice to the public or allow commenters the opportunity to address anything that closely resembles today’s final rule”—foreshadows a potential future litigation strategy against the Final Rules under the Administrative Procedure Act, in addition to anticipated arguments that the SEC lacked statutory authority and did not conduct an adequate cost-benefit analysis.⁹ Commissioner Uyeda’s remarks faulted the Final Rules as “climate regulation promulgated under the Commission’s seal…without statutory authority or expertise to address political and social issues.”¹⁰ Uyeda specifically raised the “major questions doctrine”¹¹ as a potential source of litigation challenge to the Final Rules, asserting that “the Supreme Court has made clear that a ‘colorable textual basis’ may be insufficient to support an assertion of regulatory authority, especially if Congress was unlikely ‘to delegate a policy decision of such economic and political magnitude to [the] administrative agency.”¹²

Overview

The Final Rules will require all SEC registrants, including foreign private issuers (“FPIs”), to include certain climate-related disclosures in their registration statements and periodic reports, including annual reports on Form 10-K and, in the case of FPIs, Form 20-F. ¹³ Accordingly, SEC reporting companies and issuers will need to adapt their disclosure practices to meet a wider set of reporting requirements under Regulations S-K and S-X, as summarized below. In particular, registrants must disclose:

1. information regarding climate-related risks and, if applicable, targets and goals, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, along with quantitative and qualitative disclosure of related material expenditures and material impacts to financial estimates and assumptions;
2. their climate-related governance, risk management systems and processes and targets or goals;
3. certain climate-related financial statement metrics and corresponding disclosures, including the aggregate amounts of (A) expenditures expensed and losses incurred and (B) capitalized costs and charges incurred as a result of severe weather events and other natural conditions; and
4. Scope 1 and Scope 2 greenhouse gas emissions by accelerated and large accelerated filers (“GHGs”) if material to the registrant, accompanied by scaled third-party assurance, in each case subject to the phase-in periods as further described below.

FPIs separately subject to non-U.S. climate-related disclosure requirements of other regulators may need to expand or revise their current reporting approach to ensure compliance with the Final Rules by the applicable deadlines.

Phase-in

The Final Rules will become effective 60 days after publication in the Federal Register. Compliance deadlines will depend on the registrant’s filing status, with large accelerated filers required to include:

1. all Regulation S-K and Regulation S-X disclosure (other than emissions and quantitative and qualitative disclosures of any material expenditures and material impacts on financial estimates and assumptions) commencing their fiscal year beginning in 2025 (i.e., for an issuer with a fiscal year-end, in connection with its Form 10-K or Form 20-F filed by March 2, 2026);
2. such quantitative and qualitative disclosures regarding expenditures and impacts, along with Scope 1 and Scope 2 emissions disclosure commencing (if material) their fiscal year beginning in 2026);
3. “limited assurance” on emissions disclosure commencing their fiscal year beginning in 2029; and
4. “reasonable assurance” on emissions disclosure commencing their fiscal year beginning in 2033.

Phase-in periods for registrants are summarized in the following table prepared by the Staff:

Climate-related risks and their impacts

The Final Rules (new Item 1502 of Regulation S-K) will require registrants to identify and disclose climate-related risks, as well as the material impacts these risks have had, or are likely to have, on their business, results of operations, and financial condition. Registrants must also disclose how these identified risks are likely to affect the strategy, model, and outlook of their business, as well as any plans, including initiatives, goals, or targets, to address these risks.

The SEC revised the Proposed Rules in several respects, including by adopting a less prescriptive approach to the climate-related risk disclosure and qualifying such requirements based on materiality. Item 1502(a) of the Final Rules differs from the Proposed Rule by requiring a registrant to state whether climate-related risks that have had or are reasonably likely to have a material impact are expected to occur in the short-term (the next 12 months) or in the long-term (after the next 12 months). This time frame aligns with the existing MD&A standard for liquidity disclosure, as some commenters suggested. The Adopting Release clarifies that this is the same materiality determination that is “generally required when preparing the MD&A section in a registration statement or annual report,” consistent with the prevailing standard for MD&A Item 303(a) known trend disclosures and applicable Supreme Court decisions, including Basic v. Levinson¹⁵ and TSC Industries, Inc. v. Northway.¹⁶

Furthermore, the Final Rules have eliminated the proposed requirement to disclose any material change to the climate-related disclosures provided in a registration statement or annual report in a Form 10-Q (or in a Form 6-K for a FPI).

Climate-related governance, risk management and targets

New Item 1503 of Regulation S-K will require a registrant to describe any process it has for identifying, assessing, and managing material climate-related risks, including a non-exclusive list of disclosure items. New Item 1504 of Regulation S-K will require registrants to disclose information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition. This information will include time horizons for any transition plans, and, subject to phase-in periods, 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. Furthermore, if a registrant uses carbon offsets or renewable energy credits or certificates (“RECs”) as a material component of its plan to achieve climate-related targets or goals, the Final Rules will also require such registrant to disclose, inter alia, the amount of carbon avoidance, reduction, or removal represented by the offset or generated by the RECs, their nature, source, and cost, and a description and location of the underlying projects.

New Item 1501 of Regulation S-K will require registrants to disclose information on the oversight and governance of climate-related risks and any climate-related targets or goals by their board and management, including information on the process by which the registrant identifies, assesses, and manages these risks, and whether such processes are integrated into the registrant’s overall risk management system and how the board oversees progress against the target or goal. By implication, these disclosure requirements are intimately linked: a registrant’s ability to identify, assess, and manage material climate-related risks and to oversee any climate-related targets may be compromised unless identified members or committees of its board and management have responsibility for doing so.

At the board level, a registrant must describe the board’s oversight of climate-related risks, identify any board committee or subcommittee responsible for the oversight of such risks and, if the registrant has a climate-related target or goal, describe whether and how the board oversees progress against it.

At the management level, a registrant must describe management’s role in assessing and managing the registrant’s climate-related risks, including which management positions or committees are responsible and the relevant expertise of such position holders or committee members.

Notably, the Final Rules remove a proposed provision that would have required a registrant to describe the climate-related expertise and qualifications of board members, following opposition of commenters that feared that the rules focused too narrowly on climate expertise among board members and could impair governance by restricting companies’ choices of the best individuals for their few board seats.

Although these provisions do not require an issuer to take any particular approach to climate-related risk management at either the board or management level, we expect that many issuers will respond to the new disclosure requirements by designating climate-focused board members, members of management, and committees thereof to identify, assess, and manage material climate related risks and to oversee progress against any climate-related targets or goals.

Climate-related financial statement metrics

The Final Rules (new Item 14-02 of Regulation S-X) will require registrants to disclose the impact of severe weather events and other natural conditions. They also will require registrants to discuss whether the estimates and assumptions used to produce the consolidated financial statements were “materially impacted by exposures to risks and uncertainties associated with, or known impacts from,” such severe weather events and other natural conditions.

The SEC does not provide an exhaustive list of these “natural conditions,” but they would include hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise. Commentators raised concerns around phenomena such as earthquakes, which are not typically associated with climate change, or wildfires caused by humans. The SEC has therefore clarified in the Final Rules, and the SEC staff reiterated when replying to Commissioner Peirce’s objections to the broadness of the concept, that the “natural conditions” referenced in Rule 14-02 need not be climate-related and may include types of non-climate-related occurrences (including earthquakes) “if severe and depending on the registrant’s particular facts and circumstances.” The assessment, and the consequential applicability of the disclosure requirements, is left to each registrant.

In contrast to the Proposed Rules, the Final Rules do not require a registrant to report the impact of severe weather events and other natural conditions or transition activities on each individual line item of a registrant’s consolidated financial statements. The Final Rules will require, instead, financial statement footnote disclosure in connection with (i) expenditure and losses, and (ii) capitalized costs and charges, in each case to the extent resulting from severe weather events or other natural conditions, and only if the aggregate amount of the absolute value of the effects of severe weather events or other natural conditions is one percent or greater of pretax income for income statement effects or of shareholders’ equity for balance sheet effects, with certain de minimis thresholds.

GHG emissions

The Proposed Rules would have required (i) all registrants to report Scope 1 and Scope 2 GHG emission metrics, both in terms of aggregate emissions and constituent GHGs and (ii) all filers except Smaller Reporting Companies to disclose Scope 3 GHG emissions metrics if the Scope 3 emissions were material, or if the registrant had a target or goal that included Scope 3 emissions.

The Final Rules, instead, have revised the initial proposal as follows:

• Replaced the blanket requirement for all registrants to disclose Scope 1 and Scope 2 emissions with a requirement that accelerated and large accelerated filers disclose such emissions if they are material, and subject to the phase-in periods described above;
• Exempted non-accelerated filers, smaller reporting companies, and emerging growth companies from the obligation to disclose Scope 1 and Scope 2 emissions;
• Reduced the proposed assurance requirement for Scope 1 and Scope 2 emissions disclosure by extending the phase-in period for large accelerated filers and implementing a limited assurance approach for accelerated filers; and
• Eliminated the Scope 3 emissions disclosure requirement altogether.

Potential areas of enforcement risk

Private securities litigation

The Final Rules provide that all climate-related disclosures (other than statements of historical fact) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals provided pursuant to relevant provisions of Regulation S-K are “forward-looking statements” for the purposes of the Private Securities Litigation Reform Act (“PSLRA”). This will provide registrants with some qualified protection from private liability based on such disclosures. However, registrants and other market participants must still be cautious in their approach to this disclosure: cautionary language about future risk cannot insulate from liability for the failure to disclose that a known risk has occurred. As various courts have explained, the PSLRA safe harbor does not protect one “who warns his hiking companion to walk slowly because there might be a ditch ahead where he knows with near certainty that the Grand Canyon lies one foot away.”¹⁷ In addition, such safe-harbor provisions do not apply to SEC investigations or enforcement action.

Ongoing SEC Enforcement

In March 2021, the SEC announced the creation of a Climate and ESG Task Force in its Division of Enforcement. Since that time, the SEC has designated “greenwashing” as a significant focus area and used the agency’s traditional arsenal under the federal securities laws to bring enforcement actions involving misstatements and omissions relating to ESG considerations, ESG investments, and ESG-focused policies and procedures.

For example, in 2022 and 2023, the SEC brought enforcement actions against various financial institutions arising out of alleged misstatements about their policies and procedures concerning ESG research conducted on for ESG-related investment products and recommendations.

We expect this enforcement trend to continue, certainly through the current administration, even as challenges to the Final Rules work their way through the courts.

Interplay with Item 303 of Regulation S-K

The scope of the Final Rules necessarily will be impacted by the anticipated U.S. Supreme Court decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165. Item 303 of Regulation S-K governs the contents of qualitative or non-financial statements—management’s discussion and analysis of the company’s financial statements—and imposes various affirmative disclosure requirements on public companies distinct from Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Argued in January 2024, this case will decide whether an alleged failure to disclose a “known trend or uncertainty” under Item 303 can support private securities fraud claims under Section 10(b) and rules promulgated thereunder. Depending on its scope, the ruling in this case may impact climate-related SEC actions. The SEC’s long-settled position is that Item 303 can be the basis for a Section 10(b) claim and recently has pursued enforcement actions against issuers that failed to disclose “known trend” information. See, e.g., In re Compass Minerals Int’l, Inc., Securities Act Release No. 11107 (Sept. 23, 2022).

The Role of U.S. State Consumer Protection Regimes

A key aspect to monitor going forward will be the efforts by State Attorneys General under consumer protection statutes to fill any perceived gaps in enforcement not covered by the Final Rules. A prime example is the recent action by the New York State Attorney General (“NYAG”), filed February 28, 2024, against JBS Group companies relating to alleged “unsubstantiated and misleading” claims about published net zero commitments. The NYAG alleged that the JBS Group’s “Net Zero by 2040” commitment is contradicted by its own sustainability reports and a review by a national advertising review board. The NYAG has sought an injunction to stop the alleged marketing practices as well as disgorgement of profits and other civil penalties.

This case is the latest in a series of ESG-related cases brought by state and local prosecutors. In October 2018, the NYAG sued Exxon for fraudulent representations related to financial reporting on costs of the risks posed by climate change. In April 2021, the City of New York sued Exxon, Shell, BP, Chevron, and ConocoPhillips alleging violations of the New York City’s consumer protection laws, including false advertising and deceptive trade practices related to the fossil fuel companies’ efforts to mitigate the climate changing impact of their products. The oil companies ultimately succeeded in obtaining dismissals in each of these cases, but state and local enforcement efforts continue nonetheless. Since 2019, similar consumer protection cases have been filed by state enforcement agencies against oil companies in California,¹⁸ Connecticut,¹⁹ Massachusetts,²⁰ Minnesota,²¹ Vermont,²² and the District of Columbia.²³

Conclusion

The adopting release highlights that 36% of SEC reporting companies have already incorporated climate-related keywords into their annual reports. This observed trend not only demonstrates the current relevance of climate-related reporting but also underscores the industry’s proactive inclination toward addressing environmental considerations in their financial and operational narratives, reinforcing the relevance of regulatory interventions to ensure consistency and effectiveness in such climate-related disclosures.

Although the long-awaited Final Rules eliminate some of the most burdensome elements of the Proposed Rules – particularly the Scope 3 emissions disclosure mandate – they will force nearly all SEC registrants to address difficult questions, including whether Scopes 1 and 2 emissions are “material” to their business, the extent to which they will incorporate climate-focused governance systems at their board and management levels, or whether a weather event or other “natural condition” can be considered “severe”, and therefore trigger the disclosure requirement, on the basis of an assessment of the specific facts and circumstances applicable to the registrant. We strongly encourage registrants, potential registrants, and other market participants to begin engaging with internal constituencies, outside counsel, and other professional advisors about how to manage their compliance with the Final Rules and existing securities and consumer protection laws being used by enforcement agencies on ESG topics.

Footnotes

1 SEC Release Nos. 33-11275; 34-99678.

2 Petition for Review, West Virginia v. SEC, _, (11th Cir March 6, 2024)

3 Loper Bright Enterprise v. Raimondo, 22-451, argued Jan. 17, 2024.

4 See Lizárraga, Jaime, Commissioner, SEC, Statement: Enhancing and Standardizing Climate-Related Disclosures for Investors (Mar. 6, 2024)

5 See Crenshaw, Caroline A., Commissioner, SEC, Statement: A Risk by Any Other Name: Statement on the Enhancement and Standardization of Climate-Related Disclosures (Mar. 6, 2024)

6 Id.

7 Id.

8 See Peirce, Hester M., Commissioner, SEC, Statement: Green Regs and Spam: Statement on the Enhancement and Standardization of Climate-Related Disclosures for Investors (Mar. 6, 2024)

9 Id.

10 See Uyeda, Mark T., Commissioner, SEC, Statement: A Climate Regulation under the Commission’s Seal: Dissenting Statement on The Enhancement and Standardization of Climate-Related Disclosures for Investors

11 https://www.allenovery.com/en-gb/global/news-and-insights/publications/us-supreme-court-limits-epas-regulation-of-climate-change-pollution

12 Id. (citing West Virginia v. Environmental Protection Agency, 597 U.S. 697, 723 (2022)).

13 Consistent with the Proposed Rules, the Final Rules exempt Canadian issuers that use the Multijurisdictional Disclosure System and file their annual reports on Form 40-F.

14 These items call for quantitative and qualitative disclosure of any material expenditures and material impacts on financial estimates and assumptions arising from climate-related risks, transition plans and climate-related targets or goals, respectively.

15 485 U.S. 224, 231, 232, and 240 (1988).

16 426 U. S. 438, 449 (1977).

17 See, e.g., In re Prudential Secs. Inc. P'ships Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996).

18 People v. Southern California Gas Co., 23CV040344 (Cal. Super. Ct.)

19 Connecticut v. Exxon Mobil Corp., 3:20-cv-01555 (D. Conn.)

20 Commonwealth v. Exxon Mobil Corp., SJC-13211(Mass.)

21 Minnesota v. American Petroleum Institute, 20-cv-01636 (D. Minn.)

22 Vermont v. Exxon Mobil Corp., 2:21-cv-00260 (D. Vt.)

23 District of Columbia v. Exxon Mobil Corp., 22-7163 (D.C. Cir.)