On March 6 this year, the US Securities and Exchange Commission (SEC) adopted its much-anticipated rule on the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the ‘rule’). The rule is intended to facilitate the disclosure, by US public companies and foreign private issuers, of “complete and decision-useful information about the impacts of climate-related risks on registrants” and to improve “the consistency, comparability and reliability of climate-related information for investors”.  

Originally proposed in 2022, the rule was delayed multiple times as the SEC received more than 24,000 comments from industry and environmental groups, businesses, academics, politicians and others, one of the most significant outpourings of comments in the SEC’s history.  

The rule

The rule, although substantially reduced from its original proposed form, represents a significant expansion of the SEC’s disclosure requirements. While the rule is extensive, key aspects include:

• Financial statement metrics: Registrants are required to disclose information on the impact of climate-related risks, both physical and transition risks, on the registrant’s business in their financial statements.
• Greenhouse gas (‘GHG’) emissions: In a significant shift from the proposed rule, the rule requires only certain filers to disclose material Scope 1 and Scope 2 GHG emissions. The rule notably does not require registrants to disclose Scope 3 GHG emissions – that is, all other indirect GHG emissions that occur in the upstream or downstream activities in the registrant’s value chain, as distinct from the approach taken in Europe, the UK, the state of California and elsewhere.
• Impacts of climate-related risks: The rule requires qualitative disclosure of any climate-related risks identified by a registrant that have had, or are reasonably likely to have, a material impact on the registrant’s strategy, results of operations or financial condition, and which may manifest over the short or long term.
• Risk management disclosure: If the registrant identifies a material climate-related risk, the rule requires disclosure of a registrant’s process for identifying, assessing and managing such risks and whether and how such processes are integrated into the registrant’s overall risk management system.
• Corporate governance disclosures: The rule requires registrants to disclose information about the oversight and governance of climate-related risks by, if applicable, both the registrant’s board of directors and management.

Legal challenge

Challengers brought a flurry of lawsuits shortly after the rule was released, with suits being filed in six circuit courts across the country within 10 days of the rule’s release. On March 21, following the SEC’s request and a random assignment process, the Judicial Panel on Multidistrict Litigation consolidated the challenges in a single case in the US Court of Appeals for the Eighth Circuit.  

After several litigants moved to stay the rule in the Eighth Circuit, the SEC elected to stay its own rule pending judicial review. In its order issuing the stay, the SEC reiterated its view that the rule is “consistent with applicable law” and the SEC’s “long-standing authority to require the disclosure of information important to investors in making investment and voting decisions”. The SEC underscored that it would continue “vigorously defending” the rule in court and that a stay would “allow the court of appeals to focus on deciding the merits” and “avoid potential regulatory uncertainty” for registrants that must begin taking steps toward compliance in the midst of ongoing legal challenge. It is unusual for the SEC to stay its own rule pending judicial review. Part of the motivation may be to avoid procedural litigation over the stay and to facilitate swift substantive consideration of the rule itself.

Opponents of the rule focus their arguments on three primary grounds: the Administrative Procedures Act (‘APA’), the major questions doctrine and the First Amendment.

• Under the APA, opponents could argue that the rule (1) is arbitrary and capricious because the SEC failed to take public comments sufficiently into account, justify the rule’s purported benefits, or conduct an adequate cost-benefit analysis; (2) exceeds the SEC’s statutory rulemaking authority; and (3) is not a logical outgrowth of the proposed rule, and thus did not allow the public adequate notice and comment opportunity.
• According to the judicially-created major questions doctrine, agencies which try to regulate matters of “vast economic and political significance” must point to “clear congressional authorisation” for the proposed regulation. If the rule is found to constitute a major question, it could be difficult for the SEC to argue that Congress has spoken clearly to grant the SEC authority to promulgate climate-related regulations.
• Opponents may also argue that the new disclosure requirements unconstitutionally compel speech. If the court agrees that climate-related disclosures are subjective and potentially disparaging, the government must show a substantial interest that is directly and materially advanced by a narrowly tailored rule.

Timeline

Under the rule’s compliance deadlines, the earliest companies would be required to provide disclosures is 2026. It is not yet clear whether or how the SEC’s stay and related legal challenges will impact the compliance timeline for the rule. The Eighth Circuit could also intercede with that timeline or even vacate the rule entirely. In a recent legal challenge to another SEC rule, for example, the Fifth Circuit vacated the rule just seven and a half months after it was published. Applying that same timeline to this rule, it could be vacated by late October 2024, before any registrants would be required to begin tracking data to be reported under it. In the event of a leadership change in the White House, a Republican-led SEC could also decline to defend the rule in ongoing litigation, or could seek to repeal the rule entirely. The future and ultimate scope of the rule thus remain uncertain.

The broader disclosure regime

The rule is not the only regulatory framework imposing mandatory climate-related reporting. In October 2023, California enacted two laws – the Greenhouse Gases: Climate-Related Financial Risk Act and the Climate Corporate Data Accountability Act – requiring disclosure of Scopes 1, 2 and 3 GHG emissions, and material climate-related financial risks.  

In addition, the EU’s Corporate Sustainability Reporting Directive (‘CSRD’), whose reporting requirements take effect this year, includes European Sustainability Reporting Standards (‘ESRS’) on environmental, social and governance topics.  It is expected that many large US companies will eventually be required to disclose under the CSRD. As such, even absent the SEC’s rule, many large companies in the US and elsewhere will need to begin making climate-related disclosures in the coming years.

Ulysses Smith is ESG senior advisor at Debevoise & Plimpton and editor of The Law Over Borders ESG comparative law guide. Isabelle Glimcher is a litigation associate based at Debevoise's New York office.

The second edition of the Law Over Borders ESG guide is currently being compiled. For futrher information email associate publisher [email protected].