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On March 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted, by a 3-2 vote, final rules (the “Final Rules”) to enhance and standardize climate-related disclosures by public entities and public offerings. The Final Rules, which require registrants to disclose certain climate-related information in registration statements and annual reports, come almost two years after the SEC published proposed rules on climate-related disclosures (the “Proposed Rules”). The full text of the adopting release, including the Final Rules, can be viewed here.
For over a decade, the SEC has increasingly focused on climate-related disclosures. In 2010, the SEC published guidance that outlined how existing rules may require narrative climate-related disclosure, including the potential impact of climate change on a registrant’s business. More recently, in 2021, the SEC’s Division of Corporation Finance published a sample letter to public companies delineating the kinds of climate change-related disclosures, particularly as risk factors or part of the MD&A discussion that registrants should consider. This was followed by the Proposed Rules issued on March 21. 2022, which would have required registrants, regardless of industry, size or materiality, to provide similar climate-related disclosures in registration statements and periodic reports.
The Final Rules deviate significantly from the Proposed Rules (including scaled-back disclosures and phased-in compliance dates tied to a registrant’s filer status) and reflect the SEC’s efforts to balance investor demands for more consistent, reliable and comparable information on climate-related risks on a registrant’s business with concerns regarding the additional effort and expense that the new requirements will impose on registrants. To help to mitigate registrants’ compliance burdens and reduce reporting costs, the disclosure requirements in the Final Rules are similar to those recommended by the Task Force on Climate-related Financial Disclosure (the “TCFD”), an industry-led task force aimed at better-informed investment, credit, and insurance underwriting. The Final Rules similarly draw on key concepts in the Greenhouse Gas Protocol (the “GHG Protocol”), which sets forth leading reporting standards for Greenhouse Gas (“GHG”) emissions. While the TCFD and GHG Protocol are voluntary regimes, the SEC anticipates that disclosures mandated by the Final Rules will standardize information and, consequently, aid in assessing investments and voting decisions.
The Final Rules will establish a new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X and will require registrants to disclose information relating to, among other things:
In response to comments, the SEC generally adopted a less prescriptive approach in the Final Rules. Significant changes from the Proposed Rules include:
The Final Rules carve out safe harbors for climate-related disclosures relating to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals, provided under Regulation S-K. The safe harbor clarifies that all information disclosed under the specific sections, except for historical facts, constitute a “forward-looking statement” under the Private Securities Litigation Reform Act and safe harbors for forward-looking statements under section 27A of the Securities Act and Section 21E of the Exchanged Act.
For domestic issuers, all or part of the new climate disclosures are required in Form 10-K filings under Part II, Item 6: Climate-Related Disclosure, Form 10-Q filings under Part II, Item 1B, Climate-Related Disclosure, and in certain registration statements. For Form 10-K filings, if the relevant disclosure is included in other parts of the report, such as risk factors or MD&A, the registrant may cross-reference such disclosures in Item 6. Financial statement disclosures for historical fiscal year(s) included in a registrant’s consolidated financial statements are required on a prospective basis only. Under the Final Rules, disclosure must be provided for the registrant’s most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical fiscal year(s) for which audited consolidated financial statements are included in the filing. The new disclosures are required to be tagged in inline XBRL.
The Final Rules will become effective 60 days after publication in the Federal Register. The compliance dates for new climate-related disclosures are phased in, based upon the status of the registrant as a LAF, AF, NAF, SRC or EGC. The compliance date for most of the requirements, other than GHG emissions disclosures, begins with fiscal years beginning in 2025 for LAFs, fiscal years beginning in 2026 for AFs, other than SRCs and EGCs, and for other filers (including SRCs and EGCs) with fiscal years beginning in 2027. The compliance date for a few disclosures, including quantitative and qualitative disclosures regarding material expenditures and material impacts on financial estimates and assumptions that result from efforts to mitigate or adapt to climate-related risks or to achieve climate-related targets or goals, are delayed one year from the initial compliance date. The compliance date for GHG emissions disclosures begins with fiscal years beginning in 2026 for LAFs and in 2028 for AFs with requirements for an attestation report further delayed.
The Proposed Rules were highly controversial and, even with the significant modifications to the Final Rules aimed at reducing compliance costs (both time and money), the Final Rules have already drawn strong objections, both from business groups and state officials who deem them too onerous and environmental advocates who deem them too weak. The Attorney Generals of Louisiana, Texas and Mississippi have asked the Fifth Circuit to overturn the Final Rules and a coalition of ten other Republican-led states (Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, West Virginia, Wyoming and Virginia) have filed a petition asking the Eleventh Circuit to review the SEC’s action in adopting the Final Rules. Energy industry suppliers Liberty Energy Inc. and Nomad Proppant Services LLC have also filed a lawsuit in the Fifth Circuit and both the U.S. Chamber of Commerce and the Sierra Club have hinted at possible litigation. Multiple lawsuits in multiple jurisdictions is likely to create some confusion and uncertainty as to the future of the Final Rules.
However, public companies wishing to take a “wait and see” approach should note that, even if the courts rule against some or all of the mandates in the Final Rules, the SEC is still able to file enforcement actions against companies violating existing disclosure standards.
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