SEC Issues Long-Pending Climate-Disclosure Rule

On March 6, 2024, the Securities and Exchange Commission (“SEC”) adopted by a 3–2¹ vote its long-pending rule imposing climate-related disclosure requirements on public companies (“Final Rule”). While this landmark rule significantly expands and standardizes climate-related disclosures, the SEC meaningfully scaled back its initial 2022 proposal by, for example, removing the requirement to disclose Scope 3 greenhouse gas emissions, exempting smaller companies from the requirements to disclose Scope 1 and 2 emissions, and incorporating a longer runway for registrants to comply with the Final Rule. The Final Rule has already been challenged by ten states, with further adversarial proceedings likely to come.

The SEC first proposed enhanced climate disclosure rules in March 2022 (the “Proposed Rule”).² As noted in our earlier Alert, the Proposed Rule contemplated disclosure of direct greenhouse gas (“GHG”) emissions from a public company’s operations (Scope 1), energy sources (Scope 2), and “value” chain, such as emissions generated by a company’s suppliers and by customers using its products (Scope 3). The Proposed Rule required reporting of climate-related financial risks and relevant risk management processes. The Proposed Rule represented a meaningful change to disclosure requirements surrounding climate risks and emissions, and it generated over 24,000 comments, the most the SEC has ever received on a single proposal, with impassioned opposition from certain constituencies. 

The Final Rule maintains many of the important elements of the Proposed Rule and requires that registrants disclose: 

1. climate-related risks that have materially impacted or are reasonably likely to materially impact the registrant, and the actual and potential material impacts of those risks on the registrant’s strategy, business model and outlook; 
2. activities that a registrant has undertaken to mitigate or adapt to material climate-related risks, including the use of any transition plans, scenario analysis or internal carbon prices; 
3. board oversight of climate-related risks and management’s role in assessing and managing material climate-related risks;
4. processes that a registrant has for identifying, assessing, and managing material climate-related risks;
5. specified information about a registrant’s climate-related targets or goals; 
6. the capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, subject to applicable one percent and de minimis disclosure thresholds; 
7. the capitalized costs, expenditures expensed, and losses incurred related to carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve any climate-related targets or goals; and
8. for large accelerated filers and accelerated filers (if not a smaller reporting company or emerging growth company), information about material Scope 1 and 2 emissions, as well as attestation reports at the limited assurance level and, for large accelerated filers, at the reasonable assurance level after a lengthy phase-in period. 

The Final Rule will be phased-in over several years with the first phase impacting large accelerated filers who must provide a significant portion of the new disclosures for fiscal year 2025. For these large accelerated filers, GHG emissions disclosures, attestation requirements and certain other disclosures will be required in future years. Accelerated filers, smaller reporting companies, emerging growth companies and non-accelerated filers will be required to comply after an extended phase-in period. 

Significant Departures from Proposed Rule

The Final Rule presents a scaled back climate-disclosure scheme from the one proposed in March 2022. In preparing the Final Rule, the SEC appears to have made a concerted effort to consider and respond to areas that commenters identified as particularly burdensome. Importantly, the Final Rule drops the requirement that registrants disclose Scope 3 emissions, which had been the subject of particular controversy. The SEC also loosened the requirements to disclose Scope 1 and 2 emissions by making those disclosures mandatory only if a company deems them material and by exempting smaller companies and emerging growth companies from this requirement altogether. 

The Final Rule also omits the proposed requirement to disclose in the financial statement footnotes financial impacts from severe weather events and other natural conditions or transition activities exceeding a one percent line item threshold. Pursuant to the Final Rule, financial statement footnote disclosure will also not be required for expenditures and capitalized costs associated with transition activities. The Final Rule does, however, require financial statement footnote disclosures for certain expenditures and capitalized costs subject to specified disclosure thresholds as referenced above as well as impacts on financial estimates and assumptions.

The Final Rule also eliminates certain corporate governance disclosures in the Proposed Rule. Similar to the SEC’s final cybersecurity rule, the Final Rule requires registrants to describe management’s role in assessing and managing climate-related risks, including the responsible management positions and their expertise, and the board’s responsibility for overseeing those risks. The Final Rule also requires disclosure of how the board oversees progress against any climate-related targets, goals, or transition plans. Registrants will not be obligated, however, to disclose the relevant climate related expertise of board members, the specific board members responsible for climate-related risk, the frequency of reporting climate-related risks to the board, or how the board sets climate-related targets or goals. 

Finally, the Final Rule sets forth longer phase-in periods for climate reporting, with staggered starts in 2026 and 2028 based on company size. 

California and EU Rules

The Final Rule overlaps with other, more extensive climate-disclosure schemes already in place. While the Final Rule was pending, California enacted its own GHG reporting law (SB 253) in October 2023 covering all three categories of emissions for both public and private companies doing business in the state that have annual revenues over US$1 billion (as further described in our earlier Alert). It also passed a law requiring reporting on climate-related financial risks (SB 261), which applies to public and private companies doing business in the state that have annual revenues over US$500 million. It is estimated that these laws apply to over half of the US registrants affected by the Final Rule, although the first reports under the California laws will not be due until 2026, after the Final Rule has already been phased in for larger companies. 

In addition, the European Union has adopted its own climate-related reporting regime, the Corporate Sustainability Reporting Directive (“CSRD”), which includes Scope 1, 2 and 3 emissions and requires climate-related financial risk reporting, among other things. In addition to EU-based companies, the CSRD also requires non-EU companies with EU branches that generate over 150 million Euros in revenue on the EU market to report on sustainability-related impacts, opportunities and risks. The EU has also adopted certain European Sustainability Reporting Standards (“ESRS”), which will be applied to EU companies in the 2024 fiscal year and to non-EU companies in 2028. While there are many similarities between the climate disclosures required by the CSRD and the Final Rule, there are also a number of important differences, including, for example, the scope of entities affected by the rules, the standard for determining materiality, and the precise information that must be disclosed. 

Challenges to the Final Rule

The Final Rule has immediately become the subject of legal challenge, with further adversarial proceedings likely to come.³ The Sierra Club and Earthjustice previously threatened to bring suit if the SEC backed away from requiring disclosure of Scope 3 emissions. On the other side of the aisle, within hours of the Final Rule’s release, a coalition of ten states led by West Virginia and Georgia filed a petition for review with the Eleventh Circuit, arguing that the Final Rule lacks statutory authority and raises First Amendment concerns. In addition, certain trade organizations (e.g., the US Chamber of Commerce, National Association of Manufacturers, and the American Farm Bureau Federation) sued to stop California from implementing SB253 and SB 261 and have threatened a similar lawsuit with respect to the SEC’s Final Rule. The Final Rule could be subject to challenge (i) under the Administrative Procedure Act, (ii) as an overreach of the SEC’s statutory authority under the Chevron doctrine, or (iii) under the “major questions doctrine.”

It is expected that after the effective date of the Final Rule, the SEC will monitor compliance in issuer public filings, and may initiate investigations where there are potential violations of the Final Rule.⁴ As is often the case when the SEC issues a new rule subject to such public attention, at first, enforcement staff will likely take a tempered approach and focus on investigating conduct that involves clear violations of the Final Rule. After several years of consideration, the Final Rule significantly changes the federal regulatory landscape by imposing sweeping environmental disclosure requirements on public companies and will surely face impactful legal challenges in the days ahead. 

We will issue more detailed guidance on the precise requirements of the Final Rule in the coming weeks and update the status of the legal challenges noted above.

¹The two Republican Commissioners voted against the rule while their three Democrat Colleagues voted for it.
²Press Release, SEC, SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors, (Mar. 6, 2024), https://www.sec.gov/news/press-release/2024-31.
³Representative Bill Hulzenga (R. Mich) and Sen. Tim Scott (R. S.C.) issued press releases indicating that they intend to use the Congressional Review Act (“CRA”) to challenge the Final Rule. Even if the CRA resolution passes both houses, it will likely be vetoed by President Biden (Biden vetoed a similar CRA challenge to the Department of Labor’s Final Rule -- “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”). It is notable that by issuing the Final Rule in early March, the SEC should avoid a CRA challenge by the next administration since CRA challenges must be brought within 60-days.
⁴It is noteworthy that the SEC has dedicated increased resources to these types of investigations and, in early 2021, the SEC launched a Climate and ESG Task Force. However, there has been only one enforcement action to date in this domain. The SEC alleged that statements made in environmental, social and governance (“ESG”) communications by a mining company, Vale S.A., misled investors regarding its dam safety program, which became an issue after one of its dams in Brazil experienced a massive failure, causing fatalities and extensive environmental damage and leading to a large loss in shareholder value (discussed further in our earlier Alert). We can also expect that the task force, which has thus far focused on investment advisers and asset managers, will shift its focus to issuers with the release of the Final Rule. 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Shelly Heyduk, an O’Melveny partner licensed to practice law in California; John Rousakis, an O’Melveny partner licensed to practice law in New York; Michele W. Layne, an O’Melveny of counsel licensed to practice law in California; Eric Rothenberg, an O'Melveny of counsel licensed to practice law in New York and Missouri; Kevin Kraft, an O'Melveny counsel licensed to practice law in California; William David Pollak, an O'Melveny counsel licensed to practice law in California and New York; and Chris Bowman, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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