The Securities and Exchange Commission recently amended its rules to standardize and enhance the climate-related information public companies must include in registration statements and annual reports. The SEC projects that annual compliance costs could approach $1,000,000. As approved, the rule will require public companies to spend time and money—sooner rather than later—implementing processes to gather and report the required information.

Background

Over a decade ago, the SEC issued guidance on how its existing rules may require a public company to disclose climate-related risks and impacts on its business or financial condition. Since then, the SEC has noted that climate-related disclosure practices have been inconsistent, and that many companies have been reporting climate-related information outside of SEC filings (such as in sustainability reports). The SEC reports the rule is to respond to investor demands for enhanced and standardized climate-related reporting in registration statements and annual filings.

Rule

As finalized, the SEC is requiring public companies to begin reporting the following information:

• Descriptions of any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, and financial condition, as well as the actual or potential material impacts of those same risks on its strategy, business model, and outlook.
• Any plans to mitigate or adapt to a material climate-related risk or use of transition plans, scenario analysis, or internal carbon prices to manage a material climate-related risk.
• Any oversight by the registrant’s board of directors of climate-related risks and any role by management in assessing and managing material climate-related risks.
• A description of any processes the registrant uses to assess or manage material climate-related risks.
• Any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
• Scope 1 emissions (a company’s own emissions) and/or Scope 2 emissions (emissions from third parties providing electricity and other energy power sources to a company) on a phased in basis by certain larger registrants when those emissions are material, and the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased in basis.
• Financial statement effects of severe weather events and other natural conditions, including costs and losses.

Legal Challenges

The SEC’s 2022 proposal drew significant interest – over 4,500 substantive public comments – from across the spectrum of industry, government, academia, and non-governmental organizations. The final rule has drawn significant interest as well. Since the SEC finalized the rules on March 6, a number of lawsuits challenging the rule have been filed by state attorneys general and energy companies. In response to a lawsuit filed by Liberty Energy, Inc., the Fifth Circuit Court of Appeals on March 15 temporarily blocked the SEC from implementing the new rule.  In its brief requesting that relief, Liberty advanced the following arguments:

• The Rule Violates the Major Questions Doctrine. Courts expect Congress to “speak clearly” when it intends to confer on an agency decisions of “vast economic and political significance.” Here, an investor protection agency has imposed a rule with an environmental bent (climate change) that will impose over material compliance costs across a wide range of companies. Congress has conferred jurisdiction over environmental matters to the Environmental Protection Agency, and in fact, the Environmental Protection Agency already requires both public and private companies to monitor and report greenhouse gas emissions, calling into question whether Congress has clearly authorized the SEC to promulgate a climate-related reporting rule.
• The Rule is Arbitrary and Capricious. According to Liberty’s briefing, the SEC justifies the rule on the theory that higher temperatures, droughts, and exposure to physical climate risk all reduce company revenues and that there is supposedly a relationship between climate information and asset pricing. But the SEC’s administrative record on this point is suspect.
• The Rule Violates the First Amendment. According to Liberty’s briefing, climate change is a politically charged matter, and so is whether emissions and climate change are material to corporate performance. Liberty argues that the First Amendment prohibits the government from seeking disclosure of political issues under the guise of investor disclosure requirements.

Without any discussion of these arguments, the Fifth Circuit granted Liberty’s request, which temporarily blocked implementation of the rule while the court conducts further review. Because eight other legal challenges have been filed in five other federal circuit courts, the SEC on March 19 asked that the Judicial Panel on Multidistrict Litigation randomly choose a single federal court to hear the bevy of challenges. On March 21, the Eighth Circuit Court of Appeals was chosen to review the challenges to the rule. And on March 22, with the Eighth Circuit now assigned to review the challenges, the Fifth Circuit dissolved its stay of the rule. Jackson Walker is tracking the latest legal challenge developments.

Next Steps

Especially now that the Fifth Circuit is no longer blocking implementation of the rule, we recommend that public companies start scrutinizing the final rule and thinking through how they will adjust their current practices in order to collect and report this newly required information. If the rule survives legal challenges, climate disclosures won’t be required until 2026, but work will be required in the meantime to meet that 2026 deadline. SEC Commissioner Mark Uyeda, who voted against adopting the rules, stated: “Although companies won’t make climate disclosures until early 2026, designing, testing, and implementing controls and procedures to capture that information must occur well before then.”