What obligations might publicly traded companies face in providing the U.S. Securities and Exchange Commission disclosures about climate-related risks? Some clarity emerged on March 6, 2024, when the SEC released its long-awaited Climate Disclosure Rule, although they may not be the final say on the matter.

The new SEC rule requires regulated entities to disclose key climate information in public filings such as “climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.” Other required disclosures include activities to mitigate or adapt to these climate risks, updates on climate regulated goals established by the company, and board of directors’ oversight of climate-related risks and management.

However, on March 14, 2024, the 5^th Circuit Court of Appeals issued an administrative stay of the new rule, following lawsuits by multiple parties, including the U.S. Chamber of Commerce and a coalition of 10 states. Other lawsuits are likely to be filed, including by environmental groups who will argue that the SEC rules did not go far enough. All of this suggests a lengthy legal battle.

The SEC’s Climate Disclosure Rule had already pared back the initial proposed rule significantly, choosing not to regulate “Scope 3” emissions of companies, including emissions from a company’s supply chain and customers’ use of a company’s products. Such emissions are more complex to calculate, requiring reliance on information or estimates regarding numerous other parties, and such emissions data can be duplicative of the reporting by another company, i.e., on company’s direct emissions are other company’s indirect or Scope 3 emissions. The SEC’s decision to back away from these requirements was a major win for the business community.

The decision by the SEC not to regulate Scope 3 emissions will likely result in uncertainty for many large filers. The new rule notes that the European Union enacted the Corporate Sustainability Reporting Directive (“CSRD”) in 2022, imposing what is currently the world’s most extensive climate disclosure requirements, including requirements to disclose emissions from a company’s value chain in a manner similar to what the SEC had defined as Scope 3 emissions. Eventually, many companies registered with the SEC that are traded on the European exchange could be subject to later rounds of the EU disclosure requirements. Since the SEC Rule specifically did not address the sufficiency of filings under other jurisdictions such as the CSRD, the differences in the rules will require multiple versions of disclosure filings.

In addition, California recently adopted the Climate Corporate Data Accountability Act (Senate Bill 253), which will require certain public and private U.S. companies that do business in California and have over $1 billion in annual revenues to disclose their greenhouse gas emissions (Scopes 1 and 2 emissions by 2026 and Scope 3 emissions by 2027). As such, California’s rules regulate Scope 3 emissions, meaning different content for reports for businesses that do business in California, which is defined broadly in California law.

To add to the regulatory complexity, California’s Climate-Related Financial Risk Act (Senate Bill 261), which requires certain public and private U.S. companies that do business in California and have over $500 million in annual revenues to disclose their climate-related financial risks and may reach more companies than the final SEC rule.

California’s new laws, like the SEC Climate Disclosure Rule, have drawn a legal challenge by the Chamber of Commerce and their fate is uncertain. In light of California’s budget deficits, California Gov. Gavin Newsom also cut funds for regulators to develop implementing rules, meaning they are unlikely to be in place by the year-end deadline established in the laws. He has also suggested the need for “cleanup” legislation this year to address concerns with the programs.

Further, while SEC General Counsel Megan Barbero has clarified publicly that “nothing” in the agency’s rule “expressly preempts any state law,” it could be the case that future litigation establishes that California’s rules are preempted by the SEC Climate Disclosure Rule. If California’s requirements survive intact, companies will again be faced with filing conflicting reports, with different requirements to determine reporting requirements depending on many complex regulations.

In conclusion, while the decision not to regulate Scope 3 emissions was met with relief by some in the business community, the investing community and many in the business community desire clarity on their reporting obligations. The SEC’s March 6 rule explained that current climate-related disclosures are already provided voluntarily by many companies, noting for example that 40% of regulated companies annual reports contain some climate-related discussion as a supplement to required filings. The SEC further stated its observation that the information in such materials “is inconsistent and often difficult for investors to find and/or compare across companies,” and “[a]s a result, investors have expressed the need for more detailed, reliable, and comparable disclosure of information regarding climate-related risks.” While the litigation plays its way through the courts, the state of climate disclosure regulation in the U.S. is best described as a work in progress.