The US Securities and Exchange Commission (SEC) completed a historic rulemaking on March 6, 2024 by adopting new rules requiring public companies to disclose certain climate-related information in registration statements and annual reports. Almost immediately, the new rules faced legal challenges: within 10 days, nine different petitions had been filed in six different courts of appeals seeking to undo the rulemaking. Many of these petitions challenged the scope of the rules as too burdensome, while two argued that the rules were too scaled back from the initial proposals.
On March 15, 2024, the Fifth Circuit issued an administrative stay, temporarily blocking the implementation of the rules, and on March 19 the SEC asked the US Judicial Panel on Multidistrict Litigation to consolidate the legal challenges into a single circuit through a lottery process. The Eighth Circuit was randomly selected as the venue that will hear all of the petitions.
Following the appointment of the Eighth Circuit, the Fifth Circuit lifted its administrative stay, and the issue of a stay pending review will now be decided by the Eighth Circuit. While these legal challenges create uncertainty about the future of these new disclosure rules and may take years to settle, many companies are taking action now to prepare for these and other climate disclosure rules that may impact their business.
The new rules mandate extensive disclosures regarding climate-related risks in annual reports and registration statements. Companies must provide both qualitative and quantitative information on activities they have undertaken to mitigate or adapt to these risks. Additionally, corporate governance processes must be transparent, outlining procedures for identifying, assessing, and managing material climate-related risks. If companies have publicly set climate-related targets or goals, they must disclose relevant expenditures and impacts resulting from actions taken to achieve them.
It is worth noting that the final rules differ significantly from the proposed rules, which were announced in March 2022. For example, the SEC fully eliminated the proposed requirement that companies report Scope 3 emissions (indirect greenhouse gas (GHG) emissions from a company’s value chain) if material or if the company had publicly set an emissions reduction target or goal that included Scope 3 GHG emissions.
Furthermore, only certain public companies must disclose Scope 1 and Scope 2 GHG emissions: only large accelerated filers and accelerated filers and only if deemed “material.” Smaller reporting companies and emerging-growth companies will be exempt from any GHG disclosure requirements. The final rules also scaled back the prescriptive nature of the proposed rules by providing flexibility on where and how impacted companies present the required disclosures in their applicable filings.
Finally, there is a slightly longer runway for implementation because the SEC is providing a phased-in approach over the next few years depending on the type of company and reporting form used. Large accelerated filers would be required to provide certain disclosures that address the fiscal year ended 2025 in annual reports and registration statements filed in 2026.
The litigation surrounding these rules could significantly impact the SEC’s timeline for implementation. The first task before the Eighth Circuit will be to determine whether to issue a stay during the pendency of judicial review. Proceedings before the Eighth Circuit could extend for 18 months or more, and review by the US Supreme Court, if granted, could add years to the process.
There are several legal theories the petitioners could pursue, including arguments under the Administrative Procedures Act and the First Amendment. Petitioners could also rely on the major questions doctrine, which has seen growing traction in the federal courts.
Independently, the US Congress might attempt to nullify the rules under the Congressional Review Act.
Despite these legal challenges, companies are advised not to postpone preparations for compliance with the SEC’s climate disclosure rules. While there is a phased-in runway for disclosures outlined by the rules, with the earliest reporting in early 2026, the preparation for such disclosure should begin now. Companies will want to have policies and procedures in place and rigorously tested before next year to ensure they are able to capture all the necessary data to meet future reporting requirements effectively. Discussions around what is “material” should be done holistically, with buy-in from stakeholders across the organization, including leadership.
In addition to the SEC’s new rules, multinational companies operating in the European Union will be subject to reporting requirements under the Corporate Sustainability Reporting Directive. California also enacted laws last year that require reporting of Scope 1, Scope 2, and Scope 3 GHG emissions for certain companies doing business in the state as well as reporting on climate-related financial risks.
Companies may wish to pay heed to these competing regulatory frameworks, while also considering market and peer actions to release more climate-related information. There is also a risk of overreporting, which can lead to greenwashing claims. Companies should consider engaging with experienced counsel and advisors to avoid any representations that cannot be fully supported by clear and decisive evidence.
Finally, companies could prioritize the evaluation and fortification of their governance structures. Ensuring alignment between board committees on ESG-related issues will be key to integrating governance into disclosure requirements. Conducting tabletop exercises to assess the suitability of existing structures for meeting disclosure obligations can help prevent last-minute compliance challenges while also fostering a culture of transparency and accountability within the organization.
While the ongoing legal challenges cast a shadow of uncertainty over the SEC’s climate disclosure rules, companies can still take proactive measures to ensure compliance, including implementing and testing policies and procedures, peer benchmarking, and governance evaluation. Transparency and strategic planning will be key to effectively navigating this evolving regulatory landscape.