Publication
Mission impossible? Teresa Ribera’s mission letter and the future of EU merger review
Executive Vice President Vestager’s momentous tenure as Commissioner responsible for EU competition policy is nearing its end.
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United States | Publication | March 2024
Revised on April 9, 2024
On March 6, 2024, the US Securities and Exchange Commission (SEC or Commission) adopted final rules by a 3-2 vote that would require domestic and foreign registrants to provide climate-related disclosures in their registration statements and annual reports (the Final Rules). The disclosures are much more limited in scope than originally proposed nearly two years ago. Significantly, the Final Rules do not require disclosure of Scope 3 greenhouse gas (GHG) emissions. However, the Final Rules still require a variety of disclosures, including:
The Final Rules will become effective 60 days after publication in the Federal Register. Compliance with the Final Rules will be phased in based on the type of registrant and filing. LAFs must begin making some disclosures for fiscal year 2025, while AFs and other registrants have until fiscal year 2026 or 2027. The Final Rules will be completely phased in by fiscal year 2033.
SEC Chair Gary Gensler stated the Commission received over 24,000 comments in response to the Proposed Rules (which we previously described in our publication, "US SEC proposes new rules on climate-related disclosures"). Gensler described the Final Rules as balancing investors’ demand for consistent, comparable and reliable climate disclosures with the costs imposed on registrants. Commissioner Hester Pierce, who dissented, expressed concerns about the SEC mandating that climate-related disclosures get special treatment. At the same time, Commissioner Caroline Crenshaw qualified her approval by stating she believed the Final Rules were too narrow and excluded important provisions from the Proposed Rules. Ten Republican-led states immediately petitioned the United States Court of Appeals for the Eleventh Circuit to block the rules from taking effect.
Companies should refine practices to reduce their litigation and enforcement risks. They should:
Although the Final Rules do not require companies to use scenario analysis, if a company does use scenario analysis to assess the impact of climate-related risks, and if, based on the results of scenario analysis, the company determines that a climate-related risk is reasonably likely to have a material impact on its business, operations or financial condition, then the company must disclose each scenario, including a brief description of the parameters, assumptions and analytical choices used, as well as the expected material impacts, including financial impacts, under each such scenario.
The Final Rules require companies that use internal carbon pricing to disclose certain information about the internal carbon price if its use of the price is material to how it evaluates and manages a climate-related risk. Companies that use more than one internal carbon price to evaluate and manage a material climate-related risk must disclose each internal carbon price and the reasons for using different prices.
The SEC’s 2010 Guidance identified climate-related risks that could be material and subject to disclosure, even before the Commission approved these Final Rules. Similarly, although the SEC has not previously required disclosure of GHG emissions, some companies may have reported similar information to the Environmental Protection Agency or other agencies. When disclosing existing risks for the first time, companies should be prepared to justify why the risk was not previously disclosed. Companies should be prepared to explain their reasons for determining that an existing risk has crossed the materiality threshold, such as the Final Rules themselves or developments in climate science.
The Final Rules include a safe harbor from private liability for forward-looking climate-related disclosures and estimates like transition plans, scenario analysis, the use of an internal carbon price and targets and goals. The safe harbor does not shield the disclosure of historical facts or financial statement disclosures.
The Final Rules require LAFs and AFs to disclose Scope 1 and Scope 2 emissions that are material to investors. The Proposed Rules, on the other hand, required all issuers to disclose Scope 1 and Scope 2 emissions, irrespective of materiality; and certain issuers to disclose Scope 3 emissions, if material. Whether GHG emissions are material to investors depends on whether there is a substantial likelihood that a reasonable investor would view the information as having significantly altered the “total mix” of information available. Companies should consider their GHG emissions alongside other indicators of materiality, such as public perception, the relative volume of emissions compared to the industry, the type and source of emissions and how emissions support the company or its business. There is no safe harbor for GHG emission disclosures.
The Final Rules phase-in the GHG emissions disclosure requirement. LAFs must first disclose GHG emissions for fiscal year 2026, with AFs disclosures going into effect in fiscal year 2027. The Final Rules also phase in the limited and reasonable assurance attestation requirements.
Smaller reporting companies and emerging growth companies are exempt from the Final Rules’ GHG emission disclosure requirements. Although not required, smaller companies may still choose to disclose GHG emissions. If they do, they should ensure the disclosures are accurate.
Companies must report the capitalized costs, expenditures and losses incurred because of severe weather events and other natural conditions. The Final Rules do not require companies to determine whether climate change caused the event or condition to warrant disclosure, which is intended to avoid companies having to speculate or incur the cost to determine causation.
Even companies that are not subject to the Final Rules’ disclosure requirements may be subject to disclosure requirements under other laws, including state and foreign laws. For instance, in October 2023, California enacted two new laws requiring entities doing business in the state and meeting annual worldwide revenue thresholds to publicly disclose Scope 1, 2 and 3 emissions and a climate-related risk analysis starting in 2026. Similarly, the European Union’s Corporate Sustainability Reporting Directive requires some Scope 3 disclosures. Companies—especially those operating in multiple jurisdictions—should carefully consider their reporting obligations under all applicable laws and regulations to ensure compliance.
Companies can, and should, compare their climate-related risks with those of competitors. Transparency into an industry’s overall climate-related risk aids managing those risks. By monitoring competitors’ performance, companies can adopt best practices, mitigate their own risks, reduce costs and achieve long-term goals.
The Final Rules scaled back certain disclosures in the Proposed Rules, including:
Multiple parties immediately challenged the Final Rules. The Judicial Panel on Multidistrict Litigation selected the United States Court of Appeals for the Eighth Circuit as the venue for hearing a consolidated case. On April 4, 2024, the SEC told the Eighth Circuit it would stay the Final Rules pending the court’s review.
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Executive Vice President Vestager’s momentous tenure as Commissioner responsible for EU competition policy is nearing its end.
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