After two years of public commentary and debate, the Securities and Exchange Commission (SEC) finally adopted new climate disclosure rules (opens a new window) last month. While the rules are being challenged in court — and have been temporarily stayed by the SEC during the court fight — they could present significant liability once public companies are required to comply with them, which could be as early as next year. That means companies should begin preparations now.
The new rules at a glance
On March 6, the SEC adopted final climate disclosure rules for public companies. Originally proposed in 2022, the climate disclosure rules — much like the cyber disclosure rules the agency enacted in July 2023 (opens a new window) — are intended to standardize climate-related corporate disclosures. SEC Chair Gary Gensler said the new rules “will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”
Under the new rules, public companies will be required to disclose a broad range of information, including:
Material climate-related risks and their potential impact on their business, operations and financial condition;
Any climate-related targets or goals they have identified that have or may reasonably affect their business, operations and financial condition;
Internal processes to identify, assess and manage material climate-related risks, including the roles of management and any board oversight.
Material Scope 1 and/or Scope 2 emissions metrics (required for certain classes of registrants).
The SEC’s original 2022 proposal also required that companies disclose Scope 3 emissions, reflecting their indirect impacts on the environment (for example, as a result of suppliers’ operations). Trade groups and others, however, objected to this requirement, arguing that Scope 3 emissions are difficult to measure and report. The SEC subsequently dropped Scope 3 emission reporting from the final rules.
The SEC’s new rules should help bring more uniformity to climate-related disclosures that many businesses have voluntarily made in recent years. The rules also follow similar action taken in other jurisdictions. In the U.K.. for example, climate-related disclosures have been mandatory for publicly traded companies since the start of 2021. Disclosure laws across other jurisdictions vary significantly, but the IFRS Sustainability Disclosure Standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (opens a new window) and IFRS S2 Climate-related Disclosures (opens a new window)) are increasingly becoming the standard.
Within the U.S., California adopted its own climate emission disclosure rules in October 2023. These rules, set to take effect in 2026, apply to both public and private companies that operate in California and meet certain revenue thresholds.
Legal uncertainty
All SEC registrants, including foreign private issuers, are subject to compliance with the new rules, with some exceptions. Initial compliance is required starting as early as 2025 for certain issuers (for fiscal years ending on or after December 15, 2024).
The rules, however, are currently in question due to pending legal challenges. Immediately after the final rules were published, trade groups and attorneys general in several states filed lawsuits seeking to have the rules vacated. Litigants and other opponents of the rules have argued that, in implementing the rules, the SEC:
Overstepped its statutory rulemaking authority;
Failed to adequately incorporate or analyze the significant public commentary it received following its initial proposal of the rules; and
Did not conduct an appropriate cost benefit analysis.
(While most opponents view the rules as too onerous, some have asserted that the SEC’s adopted rules — without the originally included Scope 3 emission disclosure requirement — are too lenient.)
Preparing for securities claims and regulatory action
Litigation against the new rules has been consolidated in the 8th U.S. Circuit Court of Appeals, and the SEC announced on April 4 that it would delay implementation of the regulations pending the court's decision. Public companies, however, should not wait before preparing for the new rules.
Despite being less onerous than those originally proposed, the final rules are still anticipated to introduce greater reporting complexity and substantial compliance costs for public companies. While the new rules include a safe harbor provision for climate-related disclosures (considered forward looking statements), they will also likely increase public companies’ exposure to securities and derivative claims as shareholders and plaintiff law firms review climate disclosures for adequacy and materiality. The SEC, meanwhile, has the ability to investigate and impose its own sanctions for securities law disclosure violations.
Directors and officers liability (D&O) insurance coverage purchased by public companies is intended to provide coverage for regulatory and private actions seeking damages for disclosure violations, and should protect organizations from liability arising from these new rules. D&O buyers, however, should work with insurance advisors to carefully review the language in their individual policies to ensure they respond as intended in the event of litigation or regulatory action.
Given the potential exposures created by the new rules, insurers are likely to ask insureds specific questions about their plans to comply with them. Public companies with upcoming D&O insurance renewals should work with their insurance advisors and counsel to prepare for this greater underwriting scrutiny.
