AGs of 10 States File Petition for Review with 11th Circuit
The Securities Exchange Commission (SEC) adopted final climate risk disclosure rules on March 6, 2024, nearly two years after the controversial proposed rules generated intense interest and debate. The Enhancement and Standardization of Climate-Related Disclosures for Investors (Final Rules) were adopted by a vote of three to two. The SEC acknowledged there were more than 24,000 public comments and scaled back the Final Rules in response to many of them.
The most significant and impactful change is that the Final Rules do not require companies to disclose scope 3 emissions (emissions generated up and down a company’s supply chain), which was a highly controversial component of the proposed rules.
The Final Rules limit the reporting of greenhouse gas (GHG) emissions to scope 1 emissions (direct emissions) and scope 2 emissions (indirect emissions from purchased electricity, heating or cooling) from large accelerated filers (LAF) and accelerated filers (AF) that are not smaller reporting companies (SRC) or emerging growth companies (EGC) but only if those GHG emissions are material.
The Final Rules also do not require companies to include financial impact metrics on the line items of the company’s consolidated financial statements. Instead, the Final Rules require certain disclosures of actual expenses incurred as a result of severe weather events and other natural conditions. The time frames for reporting and providing assurances was also pushed out in the Final Rules as described below and AF are not required to provide reasonable assurances.
It is widely anticipated that the Final Rules will be challenged in court. At the meeting to vote on the Final Rules, the commissioners laid the foundation for claims that may be made in any proceedings. The three commissioners in favor of the Final Rules expressed their view that climate risk is a financial risk, and the Final Rules are necessary to protect investors who are clamoring for reliable, consistent and comparable climate data. These commissioners reported that 90% of the companies in the Russell 1000 Index disclose some climate-related information and investors are relying on this information but it is not reliable, consistent or comparable. They noted that the SEC has amended its disclosure requirements dozens of times over the last 90 years based on the determination that the required information would be important to investment and voting decisions. Commissioner Caroline A. Crenshaw, paraphrasing William Shakespeare, said, “A risk by any other name would warrant disclosure rules.”
The commissioners who voted against the Final Rules expressed their view that the Final Rules do not require the disclosure of meaningful financial information, rather they attempt to address a policy issue dealing with political and social goals and that any benefits of the Final Rules do not outweigh the burden and costs of compliance borne by public companies. These commissioners referenced the major questions doctrine (the principle that Congress does not delegate to executive agencies issues of major political or economic significance) and asserted that the Final Rules are so different from the proposed rules, the Final Rules should have been reproposed with an updated cost-benefit analysis and a new public comment period.
The Final Rules will become effective 60 days after publication in the Federal Register.
On March 7, 2024, the attorney generals of 10 states (West Virginia, Georgia, Alabama, Alaska, Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming, and Virginia), filed a petition for review with the 11th U.S. Circuit Court of Appeals asserting that they will show that the Final Rule exceeds the SEC’s authority and is otherwise arbitrary, capricious, an abuse of discretion, and not in accordance with law.
Stay tuned – there is more to come!
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