SEC Finalizes Scaled Back Climate Disclosure Rule
Yesterday, the Securities and Exchange Commission (SEC) finalized its landmark climate disclosure rule, omitting so-called Scope 3 emissions that the agency has signaled for months would likely be jettisoned from the final regulation (fact sheet, press release).
The vote opens a new chapter in the debate over disclosing (GHG) greenhouse gas emissions. Republicans on and off Capitol Hill have already said they’ll try to nullify the rule through both legislation and in the courts, and ENGOs are hinting they may take the agency to court as well.
Background
The SEC released a proposed rule in April 2022 that would require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant's GHG emissions, which have become a commonly used metric to assess a registrant's exposure to such risks. In addition, under the proposed rule, certain climate-related financial metrics would be required to be disclosed in a registrant's audited financial statements.
Comments were initially due on May 20, 2022, and this was subsequently extended to June 17, 2022, to accommodate the volume of comments and allow interested parties additional time to prepare their comments. A final rule was expected to be published in October 2022; however, the SEC discovered a technological error obstructed comment submissions for a number of rulemakings, including the climate disclosure rule, and reopened the comment period until November 1, 2022.
Nearly two years after the proposed rule was published, on March 6, 2024, the SEC voted to approve a modified version of the proposed rule. Namely the Scope 3 emissions requirements have been omitted from the final rule, as first reported by Reuters last week. The final rule will become effective 60 days after publication in the Federal Register.
Highlights of the final rule
Registrants will be required to disclose climate-related risks that pose a material impact on business strategy, results of operation, or financial condition.
Any activities used to mitigate or adapt to such risk if included as well as any oversight by the board of directors and any processes that a registrant has for identifying, assessing, and managing climate-related risk.
Information regarding climate-related targets or goals that have or are likely to materially affect registrant’s business, results of operation, or financial condition.
Phased in required disclosure of Scope 1 and/or Scope 2 emissions for large accelerated filers and accelerated filers that are not otherwise exempt.
In addition to phase-in requirements, a safe harbor provision from private liability for climate-related disclosures pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals is included.
Severe weather requirements are included, requiring registrants to disclose the capitalized costs, expenditures, charges, and losses incurred as a result of severe weather events and natural conditions, subject to applicable one percent and de minimis disclosure thresholds.
A qualitative description of how the development of estimates and assumptions in financial statements were materially affected by risks and uncertainties related to severe weather events.
Registrants will also be required to disclose capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component to achieve the climate-related targets or goals disclosed.
Reaction
Republicans have indicated for months that they’ll fight to overturn the rule. Hill efforts are likely to be led by Sen. Tim Scott (R-SC), who is the top Republican on the Senate Banking Committee, and Rep. Bill Huizenga (R-MI), who chairs the House Financial Services Subcommittee on Oversight & Investigations. Per Politico, the pair are drafting disapproval resolutions under the Congressional Review Act, which allows Congress to reject executive branch regulations by simple majorities in both chambers. However, it’s worth remembering that such resolutions are subject to presidential vetoes, raising the threshold for killing a rule to two-thirds in both chambers – a significantly high bar.
Scott slammed the rule in a statement on Wednesday:
“Ignoring the concerns of Americans, small business owners, and stakeholders from across the country, Chair Gensler pressed forward with a final rule that falls outside his agency’s authority and does far more to advance the Biden administration’s far-Left climate agenda than uphold the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The last time I checked, the SEC is a securities regulator that does not employ climate scientists, and it clearly has acted without regard to the onerous burdens placed on businesses of all sizes – a blatant disregard that will harm Main Street the most. This is federal overreach at its worst, and as the lead Republican on the Senate Banking Committee, I intend to utilize the Congressional Review Act to fight this rule and protect economic opportunity for all Americans.”
Republican-led state governments are also going to take the SEC to court over the rule.
“We’re eager to review the final text, and we stand ready to pursue every available remedy for any unlawful aspects of the rule,” West Virginia Attorney General Patrick Morrisey said in a statement.
The SEC may also face litigation from environmentalists unhappy about the shape of the final rule. “The SEC should consider that litigation risk runs both ways," Andres Restrepo, a senior attorney with the Sierra Club, told E&E News last week.
