On March 21, 2022, the SEC finally issued a proposed rule on mandatory climate disclosures. This proposed rule has been expected for some time--it was widely anticipated to be a centerpiece of the Biden Administration's climate agenda, and there have been a number of statements by members of the SEC, and the Biden Administration generally, about these proposed disclosures since before Biden became President. Further, these mandatory climate disclosures align the United States with other developed economies, particularly the EU and the UK, which have focused on financial disclosures related to climate change as a useful tactic to promote environmentally-conscious policies.
The overall content of these rules is in accordance with what many commenters had anticipated. The SEC has used the TCFD guidelines as a basis for the proposed regulations, and has also mandated certain disclosures relating to GHG emissions (albeit with certain exclusions for smaller companies). While materiality remains a touchstone for the majority of the proposed rules, certain disclosures--including GHG emissions--are now mandatory regardless of the circumstances. These disclosures will also be incorporated into existing SEC filings, rather than a separate climate-focused document. The SEC has also provided for an extended roll-out of the rules, with full compliance not expected for several years, and has also incorporated safe harbor provisions related to certain disclosures, notably for Scope 3 GHG emissions. When issuing these proposed regulations, the SEC also adopted the rationale embraced by activists, namely that these proposed regulations will promote consistency in disclosures and enable investors to more readily and accurately compare potential investments concerning their respective climate impacts.
But this proposal is not yet law. The public comment period of sixty (60) days has now begun, and the SEC may adjust the rules further--whether to be more stringent or less--based upon the reaction of interested stakeholders. Even more significantly, any regulation issued by the SEC will likely face significant legal challenges. The Republican Commissioners on the SEC have telegraphed likely avenues of attack on this proposed set of regulations for months, with the most frequent (and perhaps most potent) criticism offered being that the SEC has exceeded its authority by issuing regulations concerning mandatory climate disclosures. It is not yet clear as to the extent to which these proposed rules will survive the oncoming legal onslaught.
Further, even if these proposed rules are ultimately implemented, the SEC has suggested a gradual roll-out, with the most stringent requirements--e.g., providing reasonable assurance on Scope 1 and Scope 2 emissions--not being required until the filings for fiscal year 2026. So, any changes to the fiscal reports of corporations will be gradual--no one should expect a dramatic shift overnight with respect to corporate practices. Nonetheless, the SEC has now announced the expected standard for climate disclosures, and corporations will have to adapt in order to comply and so continue accessing the capital markets in the United States.
