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SEC Approves Scaled-Back but Highly Impactful Climate Disclosure Final Rule

Brownstein Client Alert, March 7 , 2024

On March 6, the Securities and Exchange Commission (“SEC”) voted along party lines to adopt its long-awaited climate-related disclosure framework for registrants. This “Final Rule” largely reflects the proposed rule put forward by the SEC for public comment in March 2022, with one notable exception: the Final Rule no longer mandates reporting companies to disclose “Scope 3” emissions, a highly contentious prong of the original proposed rule. Although the Final Rule abandons Scope 3, it is one of the most significant public disclosure regimes since the Sarbanes-Oxley Act and will have a meaningful impact on registrants.

In the SEC’s Open Meeting considering the Rule, Chair Gary Gensler noted that the changes from the proposed rule to the Final Rule took into consideration the feedback from 24,000 comment letters, with over 4,500 unique letters. In addition to the historic volume of comments, Gensler was also under considerable pressure from Republicans and moderate Democrats in Congress to eliminate the Scope 3 disclosure requirements due to concerns with how attempts to report indirect supply chain emissions would impact smaller registrants.

In recommending approval of the Final Rule, Chair Gensler emphasized that while the SEC does not have jurisdiction over climate rules, it does have jurisdiction over public company disclosures. He further stated that the Final Rule is grounded in the same standard of “materiality” that is embodied in long-standing materiality jurisprudence, hitting back on comments that the Final Rule moves from a purely financial-based measurement of materiality to a more nuanced, multifaceted, nonfinancial materiality standard.

In turn, Commissioner Hester Peirce listed dozens of concerns in her dissent, including the 21% increase in reporting costs for the average registrant, which she pushed commission staff to monitor, and noted these costs would ultimately be . passed on to shareholders. Commissioner Peirce also noted the lack of distinctions between financial materiality and non-financial materiality, arguing the latter does not have defined standards; and she referred to the disclosures as likely to result in “climate disclosure spam.”. Her comments may provide fertile ground for the litigation that almost immediately followed the adoption of the Rule. Indeed, she questioned the SEC’s fundamental jurisdiction to adopt these rules, noting that “only a mandate from Congress” could provide a legal basis to empower the SEC to adopt this Final Rule. She also reiterated her concern that the SEC’s rulemaking process is being politicized in service of otherwise unachievable policy goals.

As expected, Commissioner Mark Uyeda also outlined his opposition to the Final Rule, while Commissioners Jaime Lizárraga and Caroline Crenshaw voted with Gensler.

Below is a high-level overview of the key provisions of the Final Rule and summary of key changes from the proposed rule. The Final Rule exceeds 800 pages and registrants should work closely with legal counsel to structure an effective, robust and comprehensive disclosure regime that is compliant with the Final Rule.

Review of Changes from the Proposed Rule to the Final

As previewed above, the Final Rule abandons mandatory indirect climate-related disclosures, known as “Scope 3.” Registrants and analysts who closely followed the proposed rule will recall that the proposed rule set out a tiered disclosure regime, requiring various levels of disclosures for direct greenhouse gas (“GHG”) emissions from the operations owned or controlled by the registrant (“Scope 1”), indirect GHG emissions from the generation of purchased or acquired energy consumed by the registrant (“Scope 2”) and climate and emission costs of third-party partners, including agents, suppliers, contractors and vendors (“Scope 3”). This regime is largely retained, although scaled back in some ways, for Scope 1 and Scope 2 emissions.

Large accelerated and accelerated filers will therefore be required to disclose Scopes 1 and 2 emissions. Further, they will need to engage a third-party firm to attest to their disclosures.

And even with the removal of Scope 3, the Final Rule still contains significant disclosures that will require registrants to train, staff and outsource a new apparatus for a climate disclosure regime.

Newly Created Disclosures

To accomplish these mandatory disclosures, the Final Rule creates a new subpart of Item 1500 of Regulation S-K and Article 14, the principal SEC disclosure regime. The new disclosures adopted by the Final Rule include the following:

A description of any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations and financial condition, as well as the actual or potential material impacts of those same risks on its strategy, business model and outlook;
Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk or use of transition plans, scenario analysis or internal carbon prices to manage a material climate-related risk;
If a registrant uses scenario analysis and, in doing so, determines that a climate-related risk is reasonably likely to have a material impact on its business, results of operations or financial condition, certain disclosures regarding such use of scenario analysis;
If a registrant’s use of an internal carbon price is material to how it evaluates and manages a material climate-related risk, certain disclosures about the internal carbon price;
A description of any processes the registrant uses to assess or manage material climate-related risks;
Disclosure about any oversight by the registrant’s board of directors of climate-related risks and any role by management in assessing and managing material climate-related risks;
Disclosure of the capitalized costs, expenditures expensed, charges and losses incurred as a result of severe weather events and natural causes that exceed a 1% de minimis threshold; and
Disclosure about any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations or financial condition.

This list is not exhaustive and registrants should work with counsel to identify all of the new disclosure requirements.

Exemptions

Notably, the Final Rule exempts non-accelerated filers and emerging growth companies from Scope 1 and Scope 2 disclosures. However, even for a registrant that is not required to disclose its GHG emissions or to include a GHG emissions attestation report, if the registrant voluntarily discloses its GHG emissions, it must report those disclosures in a Commission filing and voluntarily subjects those disclosures to third-party assurance.

Implementation Schedule

Notably, the Final Rule extends the deadline for registrants to comply with the Rule. The implementation timetable, as summarized from the Final Rule Fact Sheet, is below:

Registrant Type	Financial Statement Disclosures and Disclosures Under Reg. S-K, S-X	Specific Reg. S-K and S-X Items 1502(d)(2); (e)(2) and 1504(c)(2)	Greenhouse Gas Emissions/ Assurance Item 1505 (Scopes 1 and 2)	Greenhouse Gas Emissions/ Assurance Item 1506 – Limited Assurance	Greenhouse Gas Emissions/ Assurance Item 1506 – Reasonable Assurance	Electronic Tagging Item 1508
Large Accelerated Filers	FYB 2025	FYB 2026	FYB 2026	FYB 2029	FYB 2033	FYB 2026
Accelerated Filers	FYB 2026	FYB 2027	FYB 2028	FYB 2031	Not required	FYB 2026
Emerging Growth Companies, Non-Accelerated Filers	FYB 2027	FYB 2028	Not required	Not required	Not required	FYB 2027

As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed.

Outlook

The Final Rule drew swift scrutiny from Republicans on Capitol Hill, who allege that the Commission has exceeded its jurisdictional mandate by requiring registrants to disclose this new climate data. Senate Banking Committee Ranking Member Tim Scott (R-SC) and House Financial Services Committee Oversight Chair Bill Huizenga (R-MI) have announced their intentions to seek to invalidate the rule using the Congressional Review Act (CRA); that effort, even if it attracts Democratic support in Congress, is unlikely to succeed in nullifying the rule because their resolution would require the signature of President Biden, who supports the SEC’s rule. Note that the rule was finalized early enough in 2024 to avoid the CRA’s special provision allowing the next congress to review rules finalized within the last 60 legislative days of a presidential term. Republicans may also attempt to convince appropriators to insert a rider into the upcoming FY24 budget bill (the Financial Services and General Government bill, which funds the SEC, expires March 22) to defund the SEC’s ability to enforce the rule; Democrats, though, would see this as a “poison pill” rider and would push to have it kept out.

While congressional efforts to reverse the rule may not be successful, trade associations representing public companies are likely to file litigation based on at least three theories. First, the plaintiffs are likely to argue that the new disclosure requirements exceed the decades-old materiality standard announced in TSC Industries vs. Northway (1976) and Basic vs. Levinson (1988): is there a substantial likelihood that the new information now required to be disclosed constitutes facts that would alter the “total mix” of information that informs the investment decision. Second, the plaintiffs may argue that the SEC did not appropriately follow the Administrative Procedure Act’s command to avoid “arbitrary and capricious” rulemaking. Some of this argument is likely to rely on industry’s skepticism of the accuracy of the SEC economic analysis of the final rule (even though the SEC is not technically bound by Executive Order 12866). Finally, industry plaintiffs are likely to invoke the major questions doctrine, which the Supreme Court recently relied upon in West Virginia vs. EPA (2022) to strike down the Biden Administration’s rule requiring power plants to move off of coal-sourced energy. The major questions doctrine is federal jurisprudence that limits agencies’ work on rules with expansive effect and significant impact on the national economy without specific congressional authorization.

Beyond potential industry plaintiffs, the attorneys general of West Virginia and Georgia have already filed a case on behalf of a coalition of ten state attorneys general to seek review of the Final Rule.

The SEC’s Final Rule, whether implemented or eventually struck down, is but one of a handful of recent disclosure schemes developed over the last many years. California’s newly enacted disclosure framework is broader and requires more detailed disclosure than even the SEC’s rule, and applies to entities merely “doing business” in the state (i.e. it is not predicated upon access to investment by the public). While that law is being challenged in court on dormant commerce clause grounds, it demonstrates a shift among supporters of greater disclosure to state legislatures and regulator fora. The SEC staff, in their presentation of the Final Rule, also made clear that it was not their intention to supersede or preempt California’s rule. Internationally, the United Kingdom (UK) and the European Union (EU) have also adopted a Corporate Sustainability Reporting Directive.

Looking ahead, we will continue to analyze and work closely with clients and interested parties to confirm compliance with the Final Rule, even for the portions of the rule that are so-called “voluntary,” but that effectively serve as a template for SEC staff disclosure expectations for quarterly and annual filings. The SEC staff has already signaled that they will be aggressive against greenwashing, monitoring the filings of registrants who voluntarily disclose certain climate-related goals and risks in Sustainability Reports and on their websites but do not file affirmative disclosures in the quarterly and annual reports.

To discuss the Final Rule in more detail and understand the impact on your organization, please feel free to reach out to one of the authors of this alert.