The U.S. Securities and Exchange Commission (SEC) has issued its long-awaited climate reporting requirements, making it mandatory for the largest publicly traded companies in the U.S. to annually disclose both greenhouse gas (GHG) emissions and their material climate risks, with some requirements kicking in as early as 2025. On March 6, the SEC voted 3-2 along party lines to pass a pared down version of its March 2022 proposal, giving regulated companies the final word on the much-anticipated rule.
The final rule requires companies to disclose climate-related information in SEC filings, including:
- “Material” climate-related risks;
- Actions taken to address those risks;
- Information about board oversight of and management’s responsibility for climate-related risks; and
- Climate-related targets or goals that are “material” to the company’s business.
Larger companies must also disclose their Scope 1 (direct) and Scope 2 (indirect, related to energy use) GHG emissions, to the extent they are “material,” with phased-in requirements for some entities to provide an assurance report accompanying their emissions disclosures. This requirement is significantly scaled back from the SEC’s March 2022 proposal, which would have required reporting of Scope 3 emissions (indirect GHG emissions not otherwise included in a company’s Scope 2 emissions that occur in the upstream and downstream activities of a company’s value chain), an aspect of the proposed rule that was particularly controversial. The final rule also limits the types of companies that will be required to report Scope 1 and 2 emissions, exempting smaller reporting companies and emerging growth companies. For a more detailed breakdown of the requirements, see our synopsis here, and a tabular summary of the final rules here.
Aside from the obvious burden on companies to tabulate their Scope 1 and 2 emissions and determine whether they are material, the new law could have implications outside of the SEC context. In particular, the newly required disclosures could increase companies’ exposure to greenwashing claims. “Greenwashing” is commonly understood as making false, deceptive, or inaccurate claims about the environmental impacts or benefits of a product or a company. Recent years have seen a sharp rise in greenwashing claims against companies voluntarily disclosing their climate-related goals and targets or information about their carbon footprint. Those claims focus on holding companies accountable for their climate-related commitments, as well as challenging the basis for and accuracy of the reported information, including whether sufficient context for the information is provided. Companies subject to the SEC’s new climate-risk disclosure and GHG reporting requirements will now join the ranks of companies whose public statements about their climate and environmental impacts are subject to close scrutiny.
As a result of the new reporting requirements, investors and others will be able to compare a company’s publicly available disclosures year-over-year, track later disclosures against earlier promises, and closely inspect changes for potential signs of greenwashing. Companies could also be held accountable for potential inconsistencies in disclosures submitted to the SEC versus statements made elsewhere, such as advertisements, websites, and corporate ESG reports. Additionally, under the final rule, the SEC itself will surely be more closely examining statements about environmental and climate impacts in federal filings. With more standardized disclosure requirements, the SEC will be able to evaluate affirmative statements, as well as material omissions, on a more level playing field.
Perhaps unsurprisingly, the final rules are being challenged in federal court, leaving the future of the final rule slightly uncertain. West Virginia led a coalition of 10 states to challenge the rule in the U.S. Court of Appeals for the 11th Circuit on the same day it was issued. Petitions were also filed by states and corporations in the 5th Circuit. Environmental groups are reportedly weighing whether to challenge the rules from the other side, arguing that they do not go far enough.
Regardless of what transpires with the SEC rule, climate disclosures will still be on the table for companies subject to California’s climate disclosure reporting laws adopted in October 2023. Those laws, in their current form, apply to both public and privately held companies, require reporting of Scope 3 emissions, and have shorter deadlines than the SEC’s final rule. While the California laws have also been challenged and may be narrowed in response to a signing memo from Governor Newsom, other states are sure to want a seat at the table, ensuring that climate disclosure regulations, in some form or fashion, are here to stay.
