On March 6, 2024, as the hottest winter ever in the lower forty-eight came to a close, the U.S. Securities and Exchange Commission (“SEC”) issued its long-awaited final rule requiring public companies to disclose some of their climate-related risks to investors.[1] In a statement, SEC Chair Gary Gensler explained that the final rule will “mandate climate risk disclosures by public companies and in public offerings,” and praised the rule for upholding the “basic bargain” of federal securities law, that “[i]nvestors get to decide which risks they want to take so long as companies raising money from the public make . . . complete and truthful disclosures.”[2]

Others are less enthused than the Chair. Some environmentally-minded critics—including the Sierra Club and Democratic Commissioner Caroline Crenshaw—are lamenting that the SEC did not require more robust disclosures.[3] On March 13, the Sierra Club filed a petition for review in the United States Court of Appeals for the District of Columbia, arguing that the final rule does not go far enough to protect investors.[4] Meanwhile, Republican Commissioner Hester Peirce has denigrated the final rule for going too far (calling it “green regs and spam”), and a growing number of states and industry groups have argued in various federal courts that the final rule should not be implemented.[5] As discussed below, one of these cases has already led to an administrative stay of the rule, a potential harbinger of a longer stay or injunction to come.

In this blog post, we discuss what the SEC’s final rule covers and, just as notably, what it declines to cover, before concluding with a look ahead at potential obstacles to its implementation and the likely impact on registrants if it does go into effect.

Background:

Jurisdictions across the globe have been considering requiring companies to make climate change-related disclosures to investors.[6] For instance, in 2023, California passed legislation requiring large public and private companies to disclose their greenhouse gas emissions.[7]

In March of 2022, the SEC announced its intention to join this club by issuing an ambitious proposed rule that would have (among other things) “require[d] a registrant to disclose information about its direct greenhouse gas . . . emissions” (known as “Scope 1” emissions), its “indirect emissions from purchased electricity or other forms of energy” (aka “Scope 2” emissions), and “emissions from upstream and downstream activities in its value chain (aka “Scope 3” emissions).[8] In explaining the difference between Scope 1, Scope 2, and Scope 3 emissions, Bloomberg Law’s Mark Gongloff recently offered a cinematic example:

Let’s say I run a public company that makes Timothee Chalamet bobblehead dolls. The greenhouse gases produced by my bobblehead factory, offices and delivery trucks — all the stuff under my control — are Scope 1 emissions. The electricity I use to keep the bobblehead factory running produces Scope 2 emissions. Everything else related to my business — the plastic I source to melt down into tiny likenesses of Timothee Chalamet’s head, the private jet I take to visit bobblehead distributors, the landfills full of Timothee Chalamet bobbleheads — produces Scope 3 emissions.[9]

For most companies, the lion’s share of greenhouse gas emissions are Scope 3 emissions.[10]

After issuing its proposed rule in 2022, the SEC received more than 24,000 comment letters regarding its plan.[11] Many of these comments came from institutional investors who supported the proposal.[12] Others asked the SEC to rescind or limit the proposed rule, citing a litany of perceived problems, including the SEC’s alleged lack of statutory authority to require climate-related disclosures and the ability of registrants to voluntarily report on their climate-related risks under existing law.[13]

Key Elements of the Final Rule:

The final rule the SEC announced this month included the proposed rule’s requirements for disclosure of Scope 1 and Scope 2 emissions by big public companies but eliminated the requirement for disclosure of Scope 3 emissions, which, again, are most greenhouse gas emissions. As Chair Gensler explained in his statement, while the requirement for Scope 3 disclosures was scrapped in the face of public feedback, the final rule will still require “large accelerated filers and accelerated filers, to disclose direct emissions (Scope 1) and emissions associated with energy purchases (Scope 2) when those emissions are material.”[14] The final rule supplies “material” with its standard definition: “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.”[15]

In addition to requiring the disclosure of Scope 1 and 2 emissions where material, the final rule also requires disclosure of, for example:

• “material climate-related risks faced by a company”;
• “governance and processes used by the company to manage climate-related risks”;
• “material climate related targets or goals (if a company has them)” and its plans for achieving those goals;
• “material expenditures directly resulting from activities to mitigate climate-related risks [or] transition and targets or goals”; and
• “expenditures resulting from severe weather events.”[16]

The final rule also extends “a safe harbor from private liability for certain disclosures, other than historic facts, pertaining to a registrant’s transition plan, scenario analysis, internal carbon pricing, and targets and goals.”[17]

Timeline for Implementation and Potential Obstacles:

The final rule will soon be published in the Federal Register and is scheduled to “become effective 60 days following publication.”[18] If it becomes effective, its requirements will be phased in gradually over the coming years, with required dates for compliance depending both on the applicable requirement and the size of the filer. For example, large accelerated filers will be required to disclose their Scope 1 and 2 emissions in 2026, while accelerated filers have until 2028.[19]

Of course, the final rule may never be implemented. Congressional Republicans are hoping to rescind the regulation outright through the Congressional Review Act, though this is a longshot, particularly if President Biden is reelected.[20] More promising for foes of the final rule are the various petitions for review filed in the Fifth, Sixth, Eighth, and Eleventh Circuits by industry groups and Republican Attorneys General, which contend that “the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law.”[21] At the time of our publication, the petitions for review (plus those filed by environmentalists in the Second and D.C. Circuits) had not yet been consolidated. The furthest advanced case at this time is the Fifth Circuit’s Liberty Energy v. SEC, 24-60109 (5th Cir. 2024), where, on March 15, a three-judge panel issued an administrative stay of the final rule, effectively blocking its implementation while the court considers whether to issue a longer stay during the pendency of litigation challenging the rule.[22]

***

While the impact of the SEC’s final rule on public companies and the securities litigation landscape may be of lesser importance to the general public than the rule’s impact—if any—on slowing the course of climate change, we here at Patterson Belknap will be closely monitoring the various challenges to the final rule and judicial interpretations of it, should it ever be implemented. Should the rule eventually go into effect, it will require substantial disclosures from registrants and could expose them to a new breed of securities litigation.

[1] See generally The Enhancement and Standardization of Climate-Related Disclosures for Investors (“Final Rule”).

[2] Statement on Financial Rules Regarding Mandatory Climate Risk Disclosures, Chair Gary Gensler, Mar. 6, 2024 (“Statement of Chair Gensler”).

[3] See, e.g., SEC Climate Disclosure Rule Represents Important Progress, But Falls Short on Key Metrics of Financial Risk, Sierra Club, Mar. 6, 2024 (criticizing the SEC for its “arbitrary removal of key provisions from the final rule”); A Risk by Any Other Name: Statement on the Enhancement and Standardization of Climate-Related Disclosures, Commissioner Caroline A. Crenshaw, Mar. 7, 2024 (“Given our clear authority, [the Final Rule] is a missed opportunity. It remains my great hope that a future Commission will rise to the occasion and enact more fulsome disclosure requirements in furtherance of our mandate and investor demand.”).

[4] See Sierra Club v. SEC, 24-1067 (D.C. Cir. 2024). The Natural Resources Defense Council filed a similar petition in the Second Circuit last week. See NRDC v. SEC, 24-707 (2d Cir. 2024).

[5] See, e.g., Green Regs and Spam: Statement on the Enhancement and Standardization of Climate-Related Disclosures for Investors, Commissioner Hester M. Peirce, Mar. 6, 2024; State of West Virginia, et al. v. SEC, 24-10679 (11th Cir. 2024); Andrew Ramonas, Sierra Club Sues SEC Over Climate Mandate That ‘Falls Short,’ Bloomberg Law, Mar. 13, 2024 (describing seven petitions for review by industry interests and states—three filed in the Fifth Circuit and one each filed in the Sixth, Eighth, and Eleventh Circuits).

[6] “[G]overnments have enacted or are in the process of implementing their own climate-disclosure rules for corporations, including the European Union, the United Kingdom, Brazil, Mexico, Hong Kong and Japan. And legislation requiring companies to disclose information about climate change is pending in New York, Illinois and Washington state.” Michael Copley, NPR, Corporate America Has New Climate Rules to Follow, But Will They Cut Global Warming?, Mar. 6, 2024.

[7] The Chamber of Commerce, the American Farm Bureau and other industry-affiliated parties recently sued California to block implementation of this legislation. See Chamber of Commerce of the United States et al. v. Liane M. Randolph, (C.D. Cal. 2:24-cv-00801), Dkt. 28 (Amended Complaint).

[8] See SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, Mar. 21, 2022.

[9] Mark Gongloff, Bloomberg Law, SEC Climate Rules Are Weak, But They’re Progress, Mar. 6, 2024.

[10] See, e.g., Emma Cox & Casey Herman, PWC, Tackling the Scope 3 Challenge (estimating that Scope 3 emissions “make[] up 65-95% of most companies’ carbon impact”).

[11] See SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors, Mar. 6, 2024 (“SEC Press Release”).

[12] See Steven M. Rothstein, Ceres, Oct. 11, 2022, Analysis Shows That Institutional Investors Strongly Support the SEC’s Proposed Climate Disclosure Rule (analyzing comment letters from 320 institutional investors with over $50 trillion in assets under management and finding super-majority support for most of the proposed rule’s provisions).

[13] See Final Rule, at 41–42 (summarizing objections to the proposed rule).

[14] See Statement of Chair Gensler (summarizing requirements).

[15] See Final Rule at 105 (collecting authorities).

[16] See Statement of Chair Gensler (summarizing required disclosures); see also SEC Press Release (providing additional details regarding required disclosures).

[17] Final Rule at 32.

[18] See SEC Press Release.

[19] For a helpful chart summarizing the final rule’s mandatory compliance dated, see Deloitte’s Executive Summary of the SEC's Landmark Climate Disclosure Rule.

[20] See David Hood, Bloomberg Law, Congressional Republicans Maneuver to Block SEC’s Climate Rules, Mar. 6, 2024.

[21] See, e.g., West Virginia v. SEC, Dkt. 1-2 at 5.

[22] See id. Dkt. 59-2.