There is growing discussion surrounding the intersection of climate-related issues and public companies. Climate-related risks can significantly impact the financial performance of a public company, such as costs associated with monitoring and responding to severe weather events and other environmental conditions. Accordingly, investors, investment advisers, and management companies need more information than ever to accurately assess climate-related risks when making informed investment and voting decisions.
In response to these growing risks and concerns, the U.S. Securities and Exchange Commission (SEC) in early 2024 issued final rules concerning climate-related disclosures (Rules). The SEC anticipated that the Rules would take effect on May 28, 2024, but the SEC issued a stay following several challenges to the Rules. These challenges were consolidated through Iowa v. SEC in the U.S. Court of Appeals for the Eighth Circuit. See, e.g., Iowa v. SEC, No. 24-1522 (8th Cir. filed Mar. 12, 2024); Nat’l Legal & Pol’y Ctr. v. SEC, No. 24-1685 (8th Cir. docketed Apr. 1, 2024).
This matter is still being litigated, with the challengers recently filing a consolidated brief on June 20, 2024, that opposed the SEC’s authority to mandate climate-related disclosures. The petitioners argue, among other claims, that the SEC exceeded its authority when issuing the Rules. For instance, they argue that the Rules should be limited to financially material climate-related disclosures because the Securities and Exchange Act fights “abuses in the securities market, not the climate or the environment.” Furthermore, they argue that the Rules improperly authorize the SEC to do what the U.S. Environmental Protection Agency (EPA) has expertise in and authority over.
The Securities and Exchange Act authorizes the SEC to stay its rules pending judicial review. The SEC found that exercising its discretion to temporarily stay the rules will “facilitate the orderly judicial resolution of those challenges.” Likewise, a stay avoids regulatory uncertainty regarding compliance dates. Notwithstanding its stay, the SEC has stated that it plans to vigorously defend the validity of the Rules.
Provided the Rules survive these court challenges, the Rules in their current form will require registrants to disclose certain climate-related information. They will require registrants to create new presentation and submission requirements for climate-related disclosures, such as filing the disclosure in its registration statements and annual reports. They will create a “safe harbor” for certain climate-related disclosures, such as transition plans, scenario analysis, and targets. Finally, they will include phase-in periods for different classes of filers, such as earlier compliance dates for larger filers.
The Rules will create a new subpart 1500 of 17 C.F.R. § 229.10 (Regulation S-K) and article 14 of 17 C.F.R. § 210.1-01 (Regulation S-X). Regulation S-K relates to filing and disclosure requirements for nonfinancial statements, and Regulation S-X relates to filings and disclosures concerning financial statements. Among other requirements, these subparts will require the SEC registrant to disclose climate-related risks “that have had or are reasonably likely to have a material impact on the registrant” (emphasis added). These risks may relate to strategy, operations, short-term financial conditions, or long-term financial conditions.
The Rules create a safe harbor for disclosures related to “transition plans, scenario analysis, the use of an internal carbon price, and targets and goals.” The safe harbor can protect registrants from civil liability under the Private Securities Litigation Reform Act for “forward-looking statements” as opposed to “historic facts” in its filing. The Rules provide that including a safe harbor for forward-looking statements is consistent with the public interest and investor protection by encouraging comprehensive disclosures.
Finally, the Rules contain phase-in periods for compliance dates. Compliance dates vary based on the type of registrant and disclosure. Registrants are broken down into five filing categories: large accelerated filer (LAF), accelerated filer (AF), non-accelerated filer (NAF), emerging growth company (EGC), and smaller reporting company (SRC). In general, larger registrants, such as LAFs, will have earlier compliance dates; and smaller registrants, such as SRCs and EGCs, will have later compliance dates.
If you represent a registrant required to file with the SEC, there are a couple of items worth keeping in mind:
While it remains uncertain whether the Rules will stick, counsel should monitor the outcome of Eighth Circuit litigation concerning the Rules. Additionally, counsel should monitor developments concerning the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which may alter the SEC’s authority to engage in rulemaking and administer the Rules.
