Following a nearly two-year wait, the Securities and Exchange Commission released its Final Rule — The Enhancement and Standardization of Climate-Related Disclosures for Investors — on March 6. The Final Rule, which becomes effective 60 days after its publication in the Federal Register, requires publicly listed U.S. companies and foreign private issuers to disclose certain climate-related information in their registration statements and annual reports. On March 21, 2022, the SEC released its proposed rule, leading to fierce debate and the submission of over 24,000 comment letters, with many commenters expressing concern regarding the proposed rule’s requirement for certain entities to disclose Scope 3 greenhouse gas (“GHG”) emissions (i.e., emissions from a company’s upstream and downstream value chain). Notably, the Scope 3 GHG emissions reporting requirement has been dropped from the Final Rule. Also of note, the Final Rule provides for phased-in compliance depending on the type of registrant and disclosures being made. The earliest compliance date for most disclosures is for large accelerated filers and will apply no sooner than 2026 for information for fiscal year 2025, with later phase-in dates for GHG emissions and certain other disclosures. Below we set forth 5 key takeaways of the Final Rule.
Key Takeaways
1. Scope 3 GHG Emissions Are Out
The most hotly contested issue arising out of the proposed rule was the requirement for certain issuers to disclose Scope 3 GHG emissions. Perhaps unsurprisingly, that requirement has been dropped from the Final Rule, with the SEC citing the “potential burdens” that this requirement could impose upon registrants (including costs and other difficulties) as well as concerns regarding the reliability and robustness of Scope 3 GHG emissions data. Disclosure of Scope 3 GHG emissions in securities filings made with the SEC will, therefore, remain voluntary at this time. However, many registrants may still be obligated to report Scope 3 GHG emissions in other jurisdictions, such as California and the European Union, under their respective impending mandatory disclosure reporting regimes.
2. Scope 1 and 2 GHG Emissions Disclosure is Required ONLY for Large Accelerated Filers and Accelerated Filers and Materiality Thresholds Apply for the Disclosure of Scope 1 & 2 Emissions and “Disclose if You Have It” Items
Whereas the proposed rule required disclosure of Scope 1 (“direct GHG emissions from operations that are owned or controlled by a registrant”) and Scope 2 (“indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant”) GHG emissions by all registrants regardless of materiality, the Final Rule just requires disclosure of Scope 1 and Scope 2 GHG emissions by large accelerated filers beginning no sooner than 2026 and accelerated filers beginning no sooner than 2028, as indicated in Section (4) below. Additionally, the Final Rule only requires disclosure by such registrants if their Scope 1 and Scope 2 GHG emissions are “material.” Further, only disclosure of Scope 1 and Scope 2 in the aggregate is required under the Final Rule (a change from the requirement under the proposed rule to disclose such emissions in both the aggregate and disaggregate by each constituent GHG), although if any constituent gas of the disclosed emissions is individually material, a registrant must disclose such constituent gas disaggregated from other gases. Registrants required to report their GHG emissions metrics may do so in their annual report on Form 10-K or incorporate such information by reference in their quarterly report on Form 10-Q for the second fiscal quarter following the end of their fiscal year in which the GHG emissions metrics disclosure relates. Foreign private issuers will likewise be required to disclose their GHG emissions metrics, if appliable, in an amendment to their annual report on Form 20-F within 225 days following the end of the fiscal year to which the GHG emissions metrics disclosure relates.
Like the proposed rule, the Final Rule also requires disclosure of Scope 1 and Scope 2 GHG emissions in gross terms, excluding the impact of any purchased or generated offsets. Moreover, registrants are required to describe the methodology, significant inputs and significant assumptions used to calculate their disclosed Scope 1 and Scope 2 GHG emissions, although with some degree of flexibility to determine the same: The Final Rule allows companies to calculate GHG emissions according to the methodology that best matches their particular facts and circumstances, such as utilization of the GHG Protocol or certain ISO standards.
One of the most significant changes from the proposed rule is the addition of a materiality threshold to the Scope 1 and Scope 2 GHG emissions reporting requirements. The SEC does not explicitly provide a definition of “materiality” in the Final Rule but explains that it intends for a registrant to “apply traditional notions of materiality under the Federal securities law” in determining whether such GHG emissions are material. Moreover, “the guiding principle for this determination is whether a reasonable investor would consider the disclosure of an item of information … important when making an investment or voting decision or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” Thus, the amount of a registrant’s Scope 1 and Scope 2 GHG emissions does not determine materiality.
Whether the inclusion of a materiality threshold provides relief from GHG emissions reporting for a large number of registrants remains to be seen. It is an open question as to whether, and under what circumstances, a registrant’s Scope 1 and 2 GHG emissions could be deemed material to a “reasonable investor.” Commissioners dissenting to the Final Rule have noted that the Commission labeling asset managers “investors” is potentially a problematic characterization, perhaps opening the door to future arguments where the prerogatives of asset managers (and their proxy voting teams) who have largely been driving the demand for GHG emissions disclosures from public companies do not necessarily reflect “reasonable investor” interests.
The SEC also added materiality thresholds to a number of other requirements in the Final Rule. Registrants will only need to consider climate-related risks that materially impact or are reasonably likely to materially have an impact on their strategy, results of operation or financial condition. Registrants also need only disclose information on transition plans, scenario analyses and internal carbon pricing to the extent such disclosures have or are reasonably likely to have a material impact on how the registrant identifies, assesses, evaluates and manages climate-related risks. Additionally, under the Final Rule, information relating to transition plans, scenario analyses, internal carbon prices and climate-related targets or goals, other than historical facts, are considered to be forward-looking statements for the purposes of the Private Securities Litigation Reform Act safe harbors from private liability for disclosure.
With respect to transition plans — which the SEC placed particular emphasis on during the open meeting — registrants will only be required to disclose such plans if adopted to manage a manage a material transition risk. Transition plans are defined as “a registrant’s strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its GHG emissions in line with its own commitments or commitments of jurisdictions within which it has significant operations.” Registrants are also required to update their annual report disclosure about such plans each fiscal year by detailing the actions taken that year pursuant to the plan and how such actions have impacted their business, results of operations, or financial condition. Importantly, the Final Rule provides that such disclosure should include quantitative and qualitative information on the material expenditures incurred and the material impacts on financial estimates and assumptions directly resulting from any actions taken under the plan.
3. Regulation S-X Amendments are Largely Cut, Leaving Only Disclosures Related to Severe Weather Events and Other Natural Conditions and Carbon Offsets and RECs
Registrants are required to disclose, in a note to financial statements, the capitalized costs, expenditures expended, charges and losses incurred as a result of severe weather events and other natural conditions. Regulation 14-02 under Regulation S-X does not define either “severe weather events” or “natural conditions.” However, the SEC notes in the Final Rule that both the final amendments to Regulation S-X and Regulation S-K use the phrase “severe weather events” to reflect the Commission’s expectations that there is “significant overlap” between severe weather events and natural conditions with the types of physical risks (acute and chronic) required to be identified and disclosed by a registrant pursuant to the new requirements under Regulation S-K. Thus for Regulation S-X “severe weather events” includes hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise.
If either carbon offsets or renewable energy certificates (“RECs”) are used as a material component to a registrant’s plan to achieve its climate-related targets or goals, then disclosure of the capital costs, expenditures expended, and losses related to carbon offsets and RECs is required in a note to the financial statements.
The Regulation S-X amendments to the Final Rule are significantly less burdensome than those contained within the proposed rule. However, the Final Rule retains the one percent quantitative disclosure threshold for reporting total expenditures expensed or total capitalized costs and charges incurred as a result of severe weather events and other natural conditions, with the Commission asserting this simplifies compliance compared to a more principles-based standard, promotes comparability and consistency (both within a registrant’s own filings and across different registrants), and reduces the risk of underreporting. More specifically, disclosure of expenditures expensed as incurred and losses is required if this amount equals or exceeds one percent of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year; disclosure of capitalized costs and charges (in the aggregate amount) is required if the amount equals or exceeds one percent of the absolute value of stockholders’ equity or deficit at the end of the relevant fiscal year.
4. Compliance Deadlines Have Been Pushed Back with Several Phase-Ins Adopted
The Final Rule adopts delayed and staggered compliance dates which vary according to the registrant’s filing status. As noted above, disclosure of Scope 1 and Scope 2 GHG emissions is only required for large accelerated filers and accelerated filers where material, with smaller reporting companies, emerging growth companies and non-accelerated filers being exempt. All disclosures are required to be electronically tagged.
Below are the compliance deadlines as set forth by the Final Rule:
| Registrant Type | Disclosure and Financial Statement Effects Audit | GHG Emissions and Assurance | Electronic Tagging | |||
| All Regulation S-K and S-X disclosures, other than 1502(d)(2), 1502(e)(2), and 1504(c)(2) | Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2) | Scope 1 and Scope 2 GHG Emissions | Limited Assurance | Reasonable Assurance | Inline XBRL Tagging | |
| Large Accelerated Filers | Fiscal year beginning 2025 | Fiscal year beginning 2026 | Fiscal year beginning 2026 | Fiscal year beginning 2029 | Fiscal year beginning 2033 | Fiscal year beginning 2026 |
| Accelerated Filers | Fiscal year beginning 2026 | Fiscal year beginning 2027 | Fiscal year beginning 2028 | Fiscal year beginning 2031 | N/A | Fiscal year beginning 2026 |
| Smaller Reporting Companies, Non-Accelerated Filers and Emerging Growth Companies | Fiscal year beginning 2027 | Fiscal year beginning 2028 | N/A | N/A | N/A | Fiscal year beginning 2027 |
| Notes: Item 1502(d)(2) requires the disclosure, quantitatively and qualitatively, of “the material expenditures incurred and material impacts on financial estimates and assumption that, in management’s assessment, directly result from activities disclosed” concerning mitigation or adaptation to climate-related risks. Item 1502(e)(2) requires “the quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the transition plan’ disclosed pursuant to Item 1502. Item 1504(c)(2) requires the “quantitative and qualitative disclosures of any material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or the actions taken to make progress toward meeting the target or goal.” | ||||||
5. The Final Rule Has Already Been Challenged
Although the Final Rule was only released by the SEC recently (March 6, 2024), it is already subject to challenges: two companies have already filed a petition for review in the United States Court of Appeals for the Fifth Circuit. Additionally, a coalition of ten states filed a petition for review in the United States Court of Appeals for the Eleventh Circuit. It is likely that there will be a number of other legal challenges to the Final Rule brought in both district and circuit courts around the country. The cases filed in the Courts of Appeals will be consolidated into a single circuit court challenge based on a lottery system, the outcome of which could take weeks or even months to determine.
Whether the Final Rule is allowed to go into effect while these lawsuits are ongoing will depend on whether the court hearing the case(s) agrees to preliminarily stay the Final Rule while the challenges are pending. To receive this relief, challenges to the Final Rule will have to demonstrate that they are likely to succeed in their substantive legal challenge suit, they will suffer an irreparable harm without an injunction that outweighs the harms of an injunction and that the injunction is in the public interest. If a court does grant a preliminary stay, then the Final Rule will not go into effect unless and until the court ends the stay or the Commission ultimately prevails in the case. Otherwise, the Final Rule will be allowed to go into effect based on the compliance schedule. It is worth noting that, regardless of whether a court grants or denies a preliminary injunction, any such decision will likely be appealed all the way up to the Supreme Court.
Questions regarding the timing of litigation against the Final Rule and such litigation’s impact on the timing of the Final Rule will likely become clearer in the coming weeks, although we may not know with a high degree of certainty what is likely to happen for some time. Substantive challenges of the Final Rule could take between twelve to twenty-four months, but this timeline can be influenced by a number of factors.
What’s Next?
Until a court grants a preliminary stay, and such a stay is no longer subject to further appeals, registrants should assume that they will need to comply with the Final Rule in accordance with the schedule noted above. Thus registrants are advised to begin planning for, or continuing to plan for, compliance with the requirements of the Final Rule now. If registrants have not already done so, it is also advised that enhanced disclosure controls and policies relating to climate-related disclosures be established. With regard to the quantitative disclosures — and in particular for large accelerated filers and accelerated filers with respect to Scope 1 and Scope 2 GHG emissions — registrants should begin collecting the requisite data now. Large accelerated filers and accelerated filers should also begin preparing for compliance with the attestation requirements. Furthermore, for registrants that may also find themselves subject to other impending climate-related regulatory requirements, such as under the EU’s CSRD or California’s climate disclosure laws, active preparation may be necessary no matter the ultimate fate of the Final Rule.
Sarah Morgan co-heads V&E’s Mergers & Acquisitions and Capital Markets practice group and is a member of the firm’s partnership admissions committee.
Matt Dobbins focuses on complex regulatory counseling, remedial issues, environmental litigation, navigating the energy transition, and environmental transactional matters.
Jon Solorzano, co-head of V&E’s ESG task force, concentrates on advising public and private companies and their boards of directors and executive teams on matters and opportunities related to environmental, social and governance (ESG), corporate governance, sustainability considerations, shareholder activism, risk management, securities law and M&A. He is a former senior director of legal and corporate development for The Clorox Company.
Kelly Rondinelli, Chloe Schmergel, Josh Rutenberg and Alyssa Sieja also contributed to this article.