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July/August 2024

The SEC stayed its new climate-related disclosure rule. Now what?

Sarah Grey and Paul R Nabhan


  • The SEC’s stay of its long-awaited Final Rule on Climate-Related Disclosures leaves companies in a state of legal uncertainty once again.
  • Amid the increased risk of litigation, companies must decide whether or to what extent they should proceed with certain climate-related disclosures and their previously announced climate commitments.
  • Companies must weigh this decision while also considering the timing and the impact of the climate disclosure requirements required by California law and the CSRD in the EU.
  • Careful coordination between legal, compliance, and sustainability/ESG teams is needed to navigate the risks and uncertainties presented by the current moment.
The SEC stayed its new climate-related disclosure rule. Now what?
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On April 4, 2024, the U.S. Securities and Exchange Commission (SEC) stayed its long-awaited Final Rule on climate-related disclosures (Final Rule), which had been adopted less than a month earlier on March 6, 2024, after a lengthy regulatory process. See Order Issuing Stay (April 4, 2024). The Final Rule was met with an onslaught of litigation over the week following its adoption. Other jurisdictions around the world have for years already required disclosures included in the now-stayed Final Rule, and even in the United States, California is moving toward rulemaking implementing its own climate disclosure regime. Companies grappling with competing legal and regulatory frameworks must decide whether to stay the course on previously announced climate commitments, reframe or scale back those commitments, or otherwise adapt to the shifting legal environment, all while weighing increased risk of “greenwashing” litigation and governmental enforcement actions related to climate claims and activities.

Key features of the Final Rule

By way of background, the Final Rule requires the disclosure of climate-related information in registration statements and annual reports, including 1. information about the registrant’s material climate-related risks and the governance and management of such risks; 2. for large accelerated filers and accelerated filers, disclosure, when material, of the registrant’s greenhouse gas (GHG) emissions; and 3. certain specified disclosures related to severe weather events and other natural conditions in a note to a registrant’s audited financial statements. Among the key modifications from the SEC’s proposed rule in April 2022, the SEC withdrew the controversial requirement to disclose Scope 3 GHG emissions, which are indirect GHG emissions that occur in upstream and downstream activities in a company’s value chain. See 89 FR 21668, The Enhancement and Standardization of Climate-Related Disclosures for Investors. Within a week of the Final Rule’s adoption, 36 petitioners (including 24 state attorneys general) filed nine petitions across six federal circuit courts arguing the Final Rule was arbitrary and capricious, exceeded the SEC’s authority, was promulgated without observance of the procedures required by law, violated the major questions doctrine, and violated the First Amendment, among other things. Typical of litigation involving environmental regulations, while some petitioners argued the Final Rule went too far, others argued that the Final Rule did not go far enough, arguing that it resulted in significantly less information about companies’ exposures to climate-based risk, the SEC fell short of its mandate, and the SEC’s decision to remove robust emissions disclosure was arbitrary and fell short of what was required by law. After the U.S. Judicial Panel for Multidistrict Litigation consolidated the petitions for review before the Eighth Circuit, a coalition of 19 state attorneys general filed a motion in support of the Final Rule. The SEC stayed the Final Rule the next day, but noted it nonetheless intended to defend the validity of the Final Rule in court.

California disclosure bills signed

Meanwhile, in October 2023, Governor Gavin Newsom signed two California bills (SB-253 and SB-261) requiring GHG emissions disclosure, including Scope 3 GHG emissions, and climate-related financial risk reporting. Under the new California legislation, any company “doing business in” California with more than $1 billion in revenue must report Scope 1, Scope 2, and Scope 3 GHG emissions, and any company “doing business in” California with at least $500 million in revenue must report on their climate-related financial risks. Like the Final Rule, the two California bills were met with litigation in January 2024, which California moved to dismiss in March 2024. All such litigation is currently pending, with petitioners arguing the California bills violated the First Amendment, the Supremacy Clause, the Clean Air Act, and the Dormant Commerce Clause, and also seeking injunctive relief to prevent the California Air Resources Board from taking any action to enforce the two bills.

EU disclosure requirements in effect

In addition, the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) requires the disclosure of Scope 1, Scope 2, and Scope 3 emissions, while also requiring companies subject to the CSRD to undertake a “double materiality” assessment (i.e., disclosing both the impact on people and the environment and the risks and opportunities for the company) for climate-related disclosures. While there are a few nuanced differences, and although the CSRD covers a broad range of sustainability matters, its disclosure requirements related to climate risks and opportunities are generally similar to the Final Rule. To that end, it is estimated that over 10,000 companies outside of the EU will be subject to the CSRD, including over 3,000 U.S.-based companies. And, lest we forget, there will undoubtedly be those companies that for a variety of reasons will voluntarily make climate disclosures under an accepted framework, such as those set forth by the International Sustainability Standards Board or the Task Force on Climate-Related Financial Disclosures.

Accordingly, for companies watching the climate-related risk disclosure carousel, the question appears to be when, where, and how to jump on, not whether to take the leap. Careful decision-making about how to approach climate disclosures and pronouncement of climate goals is needed, including consideration of the company’s broader environmental, social, governance (ESG), and sustainability goals and initiatives, as there is no one-size-fits-all approach. Such decisions also should be informed by a company’s ability to adapt quickly as disclosure laws take effect. For example, in light of the pending challenge to California’s disclosure regime, the decision whether to prepare for those requirements now given applicability of the law to companies’ 2025 GHG emissions is informed by a judgment of likelihood of plaintiffs’ prevailing as well as a company’s readiness to comply with forthcoming California Air Resources Board regulations.

In sum, given the jumble of jurisdictions requiring climate-related disclosures and the patchwork of phase-in dates, careful coordination between legal, compliance, and sustainability/ESG teams is needed to mitigate the wide-ranging legal risks presented by the current moment.