SEC Stays Its Climate Rule; But Do Not Put Your Pencils Down

On April 4, 2024, less than a month after adopting landmark climate disclosure rules, the U.S. Securities and Exchange Commission (“SEC”) issued an order staying the rules.  The stay followed a number of petitions for review filed against the SEC and their consolidation before the United States Court of Appeals for the Eighth Circuit.  A briefing schedule has not been announced, and it is difficult to predict when the court will decide the matter, but the SEC vowed to “continue vigorously defending the Final Rules’ validity in court.”  One of the reasons the SEC gave for issuing the stay was to avoid “regulatory uncertainty if registrants were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity.”  It appears the SEC is settling in for a long fight.

Although the stay undeniably reduces the sense of urgency surrounding implementation of the climate disclosure rules, we caution companies against being complacent for several reasons. 

• First, the SEC staff is likely to continue issuing comment letters on companies’ current climate-related disclosures, including comments based on the SEC’s 2010 guidance on climate change disclosures.
• Second, many public companies could become subject to separate climate disclosure requirements under laws and regulations adopted in other jurisdictions, such as the European Union and individual states in the United States, most notably in California.
• Third, even if the SEC’s rules are struck down, it is likely that investor pressure will drive continued private ordering resulting in increased and more comparable climate-related disclosures, particularly for larger public companies.
• Finally, the outcome of the challenge to the SEC’s climate rules is uncertain, including with respect to the content of any portion of the rules that is upheld and the ultimate timing of required compliance with such rules.

As adopted, the climate disclosure rules require large accelerated filers to begin disclosing comprehensive new climate-related information in their annual reports covering fiscal years that begin in 2025.  Although this requirement is on hold, if the rules survive the challenge, in whole or in part, large accelerated filers will no doubt again be the first category of public companies to be required to comply.  It is likely the SEC will provide some transition period before the clock starts ticking again, although any such transition period will likely depend on the duration and result of the litigation, including which parts of the rules remain intact.[1] Large accelerated filers may want to consider the following next steps:

• The SEC staff often compares climate-related statements in company filings with climate-related information made public by the company on its website or in other reports or publications. The staff has been issuing comments for years on discrepancies it believes exist between a company’s sustainability reports and its periodic reports filed with the SEC, and these comments increased following the SEC’s issuance in 2021 of its sample letter to companies regarding climate change disclosures and its proposed climate disclosure rules in 2022.This is likely to remain a focus of the SEC’s staff, and public companies are well advised to review their public climate-related statements to ensure consistency with the disclosure in their SEC-filed reports.
• Companies should consider whether they will be subject to climate disclosure rules proposed or adopted in other jurisdictions, and if so, begin the process of understanding such rules and their impact.
• To the extent the company is already making climate-related disclosures, including with respect to greenhouse gas (“GHG”) emissions, it should maintain its focus on ensuring consistency and accuracy in such reporting, including reviewing current controls and procedures designed to ensure the accuracy of such information and ability to obtain third-party assurance of the emissions disclosures. Additionally, an awareness of public disclosures being made by peers in the same industry and similarly situated in terms of market capitalization, revenue and SEC filer status may serve as useful benchmarking should the climate disclosure rules come into effect and may inform institutional investor expectations in any case.
• The stay in the climate rules provides more time to consider controls that are currently in place to support climate-related statements, as well as what would need to be put in place under the new rules. Many large public companies already have begun to implement disclosure controls and procedures relating to climate and other sustainability disclosures, including by subjecting these disclosures to disclosure committee and board level review. However, the new rules also impose new financial statement disclosure requirements regarding costs associated with “severe weather events” and “other natural conditions.” Companies and their audit committees may want to consider the financial implications of climate-related risks that are material to their businesses, how this new financial statement disclosure requirement could be implemented and what new internal controls might be necessary to help ensure compliance. Companies can also consider initiating discussions with their auditors regarding their plans for complying with this aspect of the rules and regarding the design and testing of new or modified internal controls.
• More generally, companies may wish to evaluate current measures for board oversight and consider potential changes in board committee charters and/or task lists to modify or formalize the processes for board oversight of climate related disclosures with a view to disclosure of such oversight processes.
• GHG emissions disclosures, if material, may be among the most burdensome of the requirements in the new rules. The stay on the final rules is an opportunity for those companies subject to such requirements under the rules (i.e., large accelerated filers and accelerated filers) to make progress in identifying, gathering, and synthesizing this information, and to consider engaging with service providers to assist with this effort.

Accelerated filers, smaller reporting companies and emerging growth companies may also want to consider the steps recommended above for large accelerated filers, to the extent such companies already produce or are considering producing climate-related disclosures.  If these companies are not already generating or disclosing climate-related information, they could well use the time afforded by the rules’ challenge to:

• get up to speed on the climate-related reporting and the obligations it would impose on the company, and if material, educate their boards of directors to facilitate the company’s development of corporate governance and risk management policies and procedures related to climate risk;
• if climate-related risks are expected to be material, review climate-related disclosures that competitors, industry leaders, suppliers or end-users make; and
• strategize about the information systems, processes and controls that the company would need to implement if the rules come back into effect.

While the SEC has stayed the Final Rules, companies may take this opportunity to review their current climate-related disclosures, familiarize themselves with disclosure requirements to which they and their industry peers may become subject, and implement or update relevant controls and procedures. Covington's Securities and Capital Markets and Carbon Management and Climate Mitigation teams have extensive experience advising companies on how to navigate climate related disclosures and are eager to assist with any questions.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice.