On March 6, 2024, the Securities and Exchange Commission (“SEC”) approved the long awaited and controversial Climate-Related Disclosure Rules. The proposed rules were originally published in March 2022 and have undergone significant revisions since then. Per the SEC, “The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.” While the final rules will be phased in over the next decade, certain parts are set to take effect for large companies in 2025.

Under the landmark final rules, registrants, which includes large accelerated filers, accelerated filers, and non-accelerated filers, will have to disclose Scope 1 and 2 emissions that have a “material” impact on their business strategy, results of operations, or financial condition. Additionally, the rules require registrants to disclose the following:

• Where a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures that directly result from such mitigation or adaptation activities;
• A registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions; and
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals.

Before adopting the final rules, the SEC considered over 24,000 comment letters submitted by stakeholders in response to the initial proposal. The primary pushback against the initially proposed rules focused on Scope 3 emissions. Concerns over reliability and indirectly regulating privately held companies were also cited in many business groups’ comments to the SEC. However, while the SEC rules do not mandate the disclosure of Scope 3 emissions, California’s recently passed SB 253 requires that companies with at least $1 billion in total annual revenue and that do business in the state begin reporting Scope 3 emissions in 2027. Other jurisdictions have also adopted their own disclosure requirements, such as the European Union’s Corporate Sustainability Reporting Directive. Companies should closely evaluate the requirements in each jurisdiction they conduct business in and prepare for any impending disclosure and reporting requirements.

These scaled-back rules reduce the threat of legal action from business groups and industries including farming, which vigorously lobbied for less stringent reporting standards. In fact, the SEC noted that they took litigation risks into account when revising the final rules. Despite approving a less contentious version of the rules, ten states have already announced that they will be filing a suit challenging the SEC rules. This suit does not include a provision for a stay of the rules pending the outcome of the litigation, but as has been the case in previous challenges to environmental regulations, a motion for stay can be sought at a later date.

The SEC also faces possible lawsuits from environmental groups that pushed for stronger rules. Time will tell if the watered-down rules survive the courts. Reporting deadlines may be delayed, or ultimately eliminated, while the rules undergo litigation. However, companies should begin evaluating their emissions as this is a time-consuming process. The rules are simply too large and complex to ignore.

We will continue to monitor any updates regarding the SEC rules and other Environmental, Social, Governance requirements at the state and federal level.