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New SEC Climate Disclosure Mandate Faces Pushback

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The U.S. Securities and Exchange Commission last week approved the implementation of standardized climate disclosure rules (posted here) for publicly traded companies and in public offerings. No longer can companies simply post potential risks on their websites or through emails; rather, they must now include them in official SEC filings such as annual reports and registration statements.

The overarching goal is intended to enhance transparency concerning how companies address environmental and climate threats. The SEC’s decision was also the result of investors’ demand for more consistent and reliable information about the economic and financial consequences of climate-associated risks on a company’s operations and how the company addresses those risks in a cost-effective manner.

Indeed, the SEC adopted these rules after the review of thousands of letters received following the rules’ proposing release issued two years ago. SEC Chairman Gary Gensler explained the nature of the new rules in a press release announcing the newly mandated environmental disclosure:

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure.’ Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”

More specifically, this “guidance” now requires a company to disclose, among other things:

  • Climate-related risks — as well as information pertaining to a company’s climate-related targets or goals — that have had, or are reasonably likely to have, a material impact on the company’s business strategy, operations, or financial condition;
  • If a company has undertaken actions to mitigate or adapt to climate-related risk, a description of significant expenditures and impacts on financial estimates resulting from the mitigation or adaptation;
  • Oversight by a board of directors of climate-related risks and any management role in assessing and managing those risks;
  • Processes a company has as to identifying, assessing, and managing climate-related risks;
  • For large accelerated filers, and accelerated filers not in possession of exemptions, details pertaining to material Scope-1 and/or Scope-2 emissions (notable is the absence of Scope-3 reporting requirements in these final rules, which upset environmental organizations);
  • Capitalized costs and losses incurred as a result of severe weather events and other natural conditions;
  • Capitalized costs and losses relating to carbon offsets and renewable energy credits or certificates if used as a material component of a company’s plans to achieve disclosed climate-related targets and goals; and
  • If estimates and assumptions a company uses to produce the financial statements were materially impacted by risks and unknowns associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a quantitative description of how the estimates and assumptions’ development was impacted.

Notably, these rules are not as ambitious as the broader scope originally considered by the SEC. (For example, the initial proposal included a requirement to disclose the climate expertise of board members.)

Although the final rules will be in effect 60 days after when the adopting release is published in the Federal Register, compliance dates for the rules will be dependent upon a company’s filer status. Perhaps not so fast, however, as at least 10 states with laxer manufacturing requirements – such as Alaska, Alabama, West Virginia, and Louisiana – have already filed a petition challenging the SEC’s new environmental disclosure rules. These states claimed that the reporting mandated by the new rules is expensive, overly burdensome, and go beyond the scope of what is necessary for investors to know.

Accordingly, it might be years – not 60 days – before court battles cease and the implementation of the rules begins.