The Securities and Exchange Commission’s (SEC) new climate disclosure rule, although expected, presents various implications for publicly listed companies and other registrants. The rule, released on March 6, mandates these entities to disclose climate-related risks, transition plans, and governance. In some cases, they must also reveal greenhouse gas emissions.
Notably, this rule is a significantly scaled-down version of the 2022 proposal. Unlike its predecessor, this rule does not require Scope 3 emissions reporting and only necessitates certain registrants to report “material” Scope 1 and 2 emissions. Clearing up potential ambiguities, Scope 1 refers to greenhouse gas emissions from sources controlled by an organization, and Scope 2 pertains to indirect greenhouse gas emissions associated with purchasing energy.
The rule has drawn criticism from both ends of the spectrum. Those envisioning a more detailed, rigorous, and consistent climate reporting across the US and globally are greatly disappointed. Conversely, those arguing that current materiality disclosure obligations are more than adequate or that the SEC should not have acted are equally displeased. Nevertheless, the rule underscores the SEC’s stance that climate-related risks can be material and that investors should have access to material climate-related information for their investment decisions.
Several US state attorneys general have already challenged the SEC’s new rule and its authority to enact it, and more legal challenges from conservative factions are expected. Environmental groups such as Earth Justice and Sierra Club have also hinted at contesting the SEC’s removal of certain parts of its initial proposal.
Registrants now must contemplate how to proceed. Many have been making extensive disclosures, be it for complying with EU law, based on a materiality analysis, or voluntarily. For these entities, implementing the new rule should not pose significant challenges. However, for those experiencing explicit climate reporting requirements for the first time, it is crucial to implement processes and procedures for complete and on-time compliance. Legal challenges or a future administration’s changes should not deter or delay registrants from addressing new climate reporting requirements.
The SEC’s new enforcement approach remains uncertain. Even if the new rule is implemented as planned, it likely will take some time for market practice to develop before the SEC can calibrate its approach. As always, early and proactive measures will aid in staying ahead of legal curveballs.
Written by Ken Rivlin, partner and co-head of Allen & Overy’s environmental law group; Justin Cooke, partner in Allen & Overy’s international capital markets practice, and Jacob Ely, an associate in Allen & Overy’s environmental law group.
Please see the original article for more detailed information and context: As SEC Calibrates Climate Disclosure, Compliance Needs Adjustment