As SEC Calibrates Climate Disclosure, Compliance Needs Adjustment

As expected, the Securities and Exchange Commission’s new climate disclosure rule is a mixed bag. Released March 6, the rule requires publicly listed companies and other registrants to disclose climate-related risks, transition plans, governance—and in some cases, greenhouse gas emissions—to investors.

It’s a substantially scaled-down version of the 2022 proposal—among other things, it doesn’t require Scope 3 emissions reporting and only requires certain registrants to report “material” Scope 1 and 2 emissions.

Scope 1 refers to greenhouse gas emissions from sources controlled by an organization, and Scope 2 are the indirect greenhouse gas emissions associated with purchasing energy.

This outcome has bitterly disappointed those hoping for more detail, rigor, and consistency in climate reporting across the US and globally, while also displeasing those who believe that current materiality disclosure obligations are more than adequate or that the SEC simply shouldn’t have acted.

In any event, this new rule affirms the SEC’s view that climate-related risks can be material, and that investors should have access to material climate-related information when making investment decisions.

Next Steps

Several US state attorneys general have already challenged the new rule and the SEC’s authority to issue it, and additional legal challenges from the right are likely. Some environmental groups such as Earth Justice and Sierra Club have also raised the possibility of challenging the SEC’s removal of certain parts of its initial proposal.

The SEC clearly sought to litigation-proof the rule, and we’ll learn in due course whether and to what extent it’s been successful. In addition, the upcoming presidential election presents additional uncertainty, with the SEC’s enforcement priorities among the many issues that will be hanging in the balance of that contest.

So, the question for registrants now is how to proceed from here. Many registrants have already been making extensive disclosures, whether it’s to comply with EU law, on the basis of a materiality analysis, or voluntarily. For these registrants, the new rule shouldn’t have much of an impact.

For those subject to these new explicit climate reporting requirements for the first time, however, it’s time to start implementing processes and procedures to ensure complete and on-time compliance.

Prudence would also dictate that such registrants avoid the temptation to delay in the hopes that legal challenges or a future Trump administration SEC delay, gut, or undermine the new climate reporting requirements.

Lastly, looking at enforcement, it’s difficult to predict what approach the agency will take. Even if the new rule is implemented as currently planned, it likely will take some time for market practice to develop before the SEC can calibrate its approach.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ken Rivlin is partner and co-head of Allen & Overy’s environmental law group.

Justin Cooke is partner in Allen & Overy’s international capital markets practice.

Jacob Ely is an associate in Allen & Overy’s environmental law group.

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