I. Introduction
Earlier this year, the Securities and Exchange Commission (SEC) adopted long-anticipated rules mandating climate-related disclosures in public companies’ annual reports and registration statements (SEC Climate Rules).1 While the new rules subject many disclosure requirements to a materiality standard, they nevertheless mandate significant climate-related disclosures and disclosure-related determinations for companies.
In response to multiple legal challenges, however, in April 2024, the SEC voluntarily stayed the effectiveness of the climate disclosure rules pending judicial review.2
While the stay and the upcoming change in administration call into question the future of the SEC Climate Rules, these developments do not necessarily mean “pencils down” for companies when it comes to preparing more generally for climate-related disclosures.3 Even amid uncertainty with respect to the fate of the SEC Climate Rules, the SEC made clear that its 2010 climate guidance,4 hich provided the basis for the sample comment letter issued in September 2021 by the Division of Corporation Finance5 and subsequent comment letters to companies, remains applicable.
In addition, maintaining the momentum of preparing for compliance aligns with broader investor and other stakeholder expectations for robust voluntary climate-related disclosures.
Against this evolving landscape, companies should proactively consider the need to enhance their disclosure controls and procedures6 (DCP) and make other preparations for climate-related disclosures regardless of whether the SEC Climate Rules become effective. Even if the SEC Climate Rules are scaled back or overturned, companies are required under existing securities laws to evaluate and disclose in their periodic reports material impacts from climate-related matters, as discussed below.
In addition, many companies, including private companies, will be subject to other climate disclosure requirements, such as new mandates in California (which are also subject to pending legal challenges), as well as Europe and other jurisdictions,7 which overlap with portions of the SEC Climate Rules.8
In light of the growing focus on, and demand for, climate-related disclosures and the uncertainty around the SEC Climate Rules, companies should consider an approach that balances risk tolerance, climate disclosure readiness, and competition for compliance resources.
Section II of this article describes climate-related reporting requirements and frameworks that can provide the foundation for enhanced climate-related reporting. Section III discusses implications of additional climate-related reporting requirements for companies’ DCP and recommendations for enhancing these DCP to prepare accurate and complete disclosures.
While this article focuses on disclosure controls and procedures to support accurate and complete climate-related disclosures in SEC filings, the principles generally are applicable to other climate disclosure regimes and disclosure topics, as well as to voluntary climate-related disclosures.9
II. Climate-Related Disclosure Obligations
As the SEC has noted, even without the SEC Climate Rules, companies are required to make climate-related disclosures in registration statements and periodic reports if they are material to the company.10 For example, Rule 408 under the Securities Act of 1933, as amended (Securities Act), and Rule 12b‑20 under the Securities Exchange Act of 1934, as amended (Exchange Act), require companies to disclose, in addition to the information expressly required by SEC rules, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”11
In addition to SEC requirements, as noted above, many companies also will be subject to other climate disclosure mandates in various countries and/or states where they do business.
Current SEC Requirements and SEC Guidance
An increasing number of public companies are already incorporating climate-related disclosures into their SEC filings. According to a March 2024 study, more than 90% of S&P 500 companies disclosed climate change or emissions matters in the risk factors section of their most recent annual report.12
Even if the new SEC Climate Rules are scaled back or vacated, existing securities laws may still require the evaluation and disclosure of material impacts from climate-related matters. For example, climate-related disclosure may be required in companies’ periodic reports, including in the description of business, legal proceedings, risk factors, and Management’s Discussion and Analysis (MD&A) sections.
The SEC’s 2010 climate guidance13 and the SEC staff’s 2021 sample letter to companies regarding climate change disclosures14 provide historical context for the current requirements. The 2010 guidance outlines the SEC’s expectations for companies to consider climate change in their risk assessments and disclosures, serving as a precursor to the more detailed rules adopted this year. Consideration of and adherence to these guidelines may make for an easier transition to more robust disclosure to the extent companies have already been integrating some level of climate risk analysis into their reporting processes.
In addition, the SEC staff’s 2021 sample letter to companies regarding climate change disclosures put companies on notice about the SEC staff’s renewed focus on climate disclosures as part of the disclosure review process.
Recent SEC Enforcement Actions on Nonfinancial Disclosures
The SEC has brought several notable enforcement actions against companies for alleged inadequate environmental or social disclosures in recent years. In 2023, the SEC brought an enforcement action against a company15 for failure to maintain adequate disclosure controls related to workplace misconduct, highlighting the importance of robust DCP.
Also in 2023, the SEC brought an enforcement action against a publicly traded Brazilian mining company, alleging false and misleading disclosures about the safety of its dams in the company’s sustainability reports, periodic reports, and other ESG disclosures prior to a deadly collapse of one of its dams.16
In September 2024, the SEC charged a company with making inaccurate statements regarding the recyclability of its beverage pods, resulting in the company settling for a $1.5 million civil penalty.17 While these cases did not pertain directly to climate disclosures, they underscore the SEC’s broader focus on the accuracy and completeness of nonfinancial disclosures, and in particular, the processes in place to capture and report such information.
Companies should be mindful that robust and comprehensive DCP are key to helping ensure that public disclosures are accurate and capture all material information necessary for investor understanding of the company’s business.
In September 2024, Bloomberg reported that the SEC disbanded the Division of Enforcement’s Climate and ESG Task Force (ESG Task Force),18 which was established in March 202119 to, among other things, identify material gaps or misstatements in issuers’ disclosure of climate risks. According to the article, the SEC issued a statement on the elimination of the ESG Task Force, noting its view that “[t]he strategy has been effective, and the expertise developed by the task force now resides across the Division.”20
In light of the dissolution of the ESG Task Force, the broader backlash against ESG, and the upcoming change in administration, the SEC Division of Enforcement may at least temporarily reduce its focus on companies’ environmental and social disclosures compared to recent years.21
III. Enhancing Disclosure Controls and Procedures
The SEC Climate Rules require extensive climate-related disclosures, including (i) material climate-related risks, strategy, targets/goals and governance; (ii) a new note to companies’ audited financial statements regarding “severe weather events and natural conditions,” whether or not related to climate change; and (iii) material expenditures that are a direct result of (a) climate-related risk mitigation/adaption, (b) disclosed transition plans and/or (c) disclosed targets/goals (or actions taken to achieve/progress toward those targets/goals) and their impact on financial estimates and assumptions.
Larger companies also would need to disclose Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions, if material, accompanied by an attestation report by an independent third party that meets minimum assurance levels based on a phase-in timeline set forth in the rules. Notwithstanding the uncertainties associated with the SEC Climate Rules, companies should remain focused on the accuracy and completeness of climate-related disclosures currently required or otherwise included in SEC filings.
Climate-related disclosures included in SEC filings “filed” with the SEC are subject to potential liability under Section 18 of the Exchange Act and Section 11 of the Securities Act (if included in or incorporated by reference into a Securities Act registration statement). These provisions impose liability on issuers for making false or misleading statements in SEC filings with respect to any material fact relied on by investors.
As companies add or expand climate-related disclosures in their SEC filings, they are likely to face increased potential liability from expanded disclosures. Thus, companies should consider taking a proactive and methodical approach to climate-related DCP to minimize exposure to liability based on inaccurate or incomplete disclosures.
Companies should revisit existing DCP for SEC filings. This review should assess whether current controls are sufficient to make timely materiality determinations, and capture and report climate-related information accurately and comprehensively. Outlined below are certain practices that companies may consider when enhancing existing DCP to address climate-related disclosures.
Internal oversight. Companies should assess whether their current disclosure oversight structure is appropriate with respect to climate-related disclosures. This assessment may include consideration of whether the company’s disclosure committee regularly reviews climate-related disclosures and includes the appropriate personnel. For example, a disclosure committee should consider expressly including climate and other sustainability-related disclosures in the scope of its review and addressing any gaps in relevant subject matter expertise by adding a member with such expertise.22 In addition, the disclosure committee may further delegate climate-related disclosures to a subcommittee or a working group. Alternatively, a company that has separate disclosure committees for SEC reporting and sustainability disclosures should consider whether there is sufficient coordination and communication, including overlapping members, between the two committees.
Materiality considerations. Disclosures required under existing SEC rules are based on materiality determinations under the traditional materiality standard, i.e., whether there is a substantial likelihood that a reasonable investor would consider information important when deciding to buy, sell or vote securities. Because materiality determinations are inherently judgment-based and subject to SEC or investor scrutiny with the benefit of hindsight, robust processes should support decision-making.23 Companies should continue to assess the impact of climate-related risks on their business as a whole and should consider designing a materiality assessment process that helps ensure all significant and applicable aspects of the company’s climate-related risks and strategies are captured and properly considered for disclosure. Companies should develop and consistently apply criteria for assessing materiality, taking into account quantitative and qualitative factors, as well as industry norms, regulatory guidance, and stakeholder expectations.24 This process should involve input from cross-functional teams, such as legal, finance, sustainability, and operations, to gain a comprehensive view of the company’s climate-related risks and opportunities. Companies that are subject to multiple climate disclosure regimes also should be mindful of differing “materiality” standards under other disclosure frameworks — for example, the EU’s CSRD incorporates a “double materiality” standard.25
Subcertification process. Enhancing subcertification processes can help ensure that climate-related information is accurately captured and reported. Subcertifications involve having key personnel in the relevant departments certify the accuracy and completeness of the information they provide, thereby increasing accountability and reducing the risk of errors or omissions. This process can help mitigate risks related to Securities Act and Exchange Act liability for false or misleading statements in company filings.
External engagements and assurance. Engaging external advisers with expertise in compiling climate-related data and preparing related disclosures can provide valuable insights and help enhance DCP.26 A company’s team of external advisers may include consultants, legal advisers and third-party attestation providers (which, under the SEC Climate Rules, may be the company’s independent auditor for financial reporting purposes). A company that is required to retain an attestation provider under the CSRD or other regulatory mandates may want to consider whether that provider qualifies as independent under the SEC Climate Rules.27 In addition, companies should confer with their auditors as they implement any controls to track climate-related impacts on the financial statements.
Board and committee oversight. Thoughtful assignment of board and committee oversight responsibilities is key for climate risk assessment and reporting.28 While in some cases, ESG oversight may fall within the purview of the board more generally, boards may consider delegating responsibility for more detailed review of climate-related disclosures to a board committee with dedicated resources to:
- Oversee disclosure controls concerning climate-related matters, including the processes and procedures for accuracy and completeness of the company’s climate-related disclosures and their alignment with regulatory requirements.
- Review processes for identifying, assessing, and managing climate-related risks, assessing whether these processes are robust and integrated into the company’s overall risk management framework.
Coordinated public disclosures. Stand-alone ESG or sustainability reports and other climate-related disclosures outside of SEC filings should be consistent with SEC filings to avoid discrepancies. While companies may include certain disclosures in voluntary reporting that are not included in SEC filings, companies should make clear (i) why they are presenting such voluntary disclosures and (ii) that such voluntary disclosures are not material. Similarly, companies may choose to include such voluntary disclosures in their SEC filings but should provide an explanation for why the information is provided (e.g., if the information is not material but provides helpful context).
Consistency is essential to maintain stakeholder trust and avoid potential regulatory scrutiny. To help ensure consistent and accurate public disclosures across platforms for both required and voluntary disclosures, companies should consider:
- Regularly reviewing and reconciling public statements made in SEC filings and through other media to confirm whether all climate-related information is accurate and aligned across disclosures.
- Analyzing appropriate differences between nonmaterial climate-related statements for noninvestor stakeholder audiences and reporting material climate-related risks and impacts for investors.
- Maintaining a calendar of climate-related disclosure activities, disclosures, and deadlines, which can help build a cadence of internal processes and facilitate consistent disclosures over time.
- Assembling and regularly communicating with cross-functional teams and external advisers to coordinate a comprehensive and harmonized approach.
IV. Conclusion
Preparing for enhanced climate-related reporting requires taking a multifaceted approach, balancing regulatory requirements, investor and other stakeholder demands, internal readiness, and competition for compliance resources. Companies should ensure that their DCP are robust, comprehensive, and capable of adapting to the evolving regulatory environment. Doing so can reduce the regulatory and litigation risks, maintain investor confidence, mitigate the potential for reputational harms, and demonstrate commitment to risk oversight and responsible governance.
For further information, please contact:
Marc S. Gerber, Partner, Skadden
marc.gerber@skadden.com
_______________
1 The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11275; 34-99678 (Mar. 6, 2024).
2 See In the Matter of the Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11280, 34-99908 (Apr. 4, 2024). In a court filing, the SEC also indicated that it will “publish a document in the Federal Register at the conclusion of the stay addressing a new effective date” for the climate disclosure rules. (See Securities and Exchange Commission’s Omnibus Opposition to Petitioners’ Motions for Stay Pending Disposition of Petitions for Review, page 5, footnote 2).
3 In May 2024, the Society for Corporate Governance conducted a survey on SEC climate disclosure rule compliance preparation among its members. A total of 101 members across 27 industries responded, comprising about 50% large-cap or above (over $10 billion in market capitalization), 36% mid-cap (between $2 billion and $10 billion) and 14% small-cap or below (below $2 billion). While 87% of companies responded that they are proceeding with preparing for compliance at varying paces and scope, in light of more recent developments, it is uncertain whether companies will continue preparing for compliance.
4 Commission Guidance Regarding Disclosure Related to Climate Change, Rel. Nos. 33-9106; 34-61469 (Feb. 2, 2010), 75 Fed. Reg. 6290 (Feb. 8, 2010).
5 See Sample Letter to Companies Regarding Climate Change Disclosures, SEC Staff Guidance (Sept. 2021).
6 SEC rules define “disclosure controls and procedures” as controls and other procedures designed to ensure that information required to be disclosed in all SEC filings is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the company’s management as appropriate to allow timely decisions regarding required disclosures. See Exchange Act Rules 13a-15(e) and 15d-15(e).
7 For example, California enacted the following climate-related disclosure requirements, which remain subject to litigation: (1) the Climate Corporate Data Accountability Act (SB 253) will require companies that have more than $1 billion in annual revenue to disclose Scopes 1, 2 and 3 emissions; (2) the Climate-Related Financial Risk Act (SB 261) requires companies doing business in California with more than $500 million in annual revenue to report their climate-related financial risks and measures that they are using to mitigate these risks using the Task Force on Climate-Related Financial Disclosures (TCFD), or equivalent framework; and (3) the Voluntary Carbon Market Disclosures Act (AB 1305) requires companies that operate in California and make claims of net zero, carbon neutrality or significant emissions reductions to substantiate them on their website. In Europe, the EU Corporate Sustainability Reporting Directive (CSRD) creates sustainability reporting obligations for both EU and certain non-EU companies and expands the disclosure requirements for ESG information. Additional regulations in the EU and United Kingdom include heightened standards for due diligence policies and procedures related to environment and human rights and rules designed to prohibit “greenwashing.”
8 For instance, California’s SB 261, which requires disclosure of detailed climate risk assessments and mitigation strategies, overlaps with the SEC Climate Rules but may also introduce unique jurisdiction-specific reporting obligations.
9 This article is intended to update and build upon our 2021 publication, “Enhancing Disclosure Controls and Procedures Relating to Voluntary Environmental and Social Disclosures” (Jun. 29, 2021), which discussed disclosure controls and procedures relating to voluntary environmental and social disclosures.
10 See In its 2010 guidance, the SEC identified Item 101 (Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors) and Item 303 (MD&A) as Regulation S-K line items that may trigger climate change disclosures if material to the registrant. All of these items apply to Form 10-K, and most apply to Form 10-Q filings as well. See Commission Guidance Regarding Disclosure Related to Climate Change, Release Nos. 33-9106; 34-61469; FR-82 (Feb. 8, 2010).
11 17 CFR § 230.408 and 17 CFR § 240.12b-20.
12 Comprehensive Analysis of the SEC’s Landmark Climate Disclosure Rule, Deloitte (Mar. 15, 2024; Updated Apr. 8, 2024).
13 See footnote 4.
14 See footnote 5.
15 See Press Release, Securities and Exchange Commission, Activision Blizzard To Pay $35 Million for Failing To Maintain Disclosure Controls Related to Complaints of Workplace Misconduct and Violating Whistleblower Protection Rule (Feb. 3, 2023).
16 See Press Release, Securities and Exchange Commission, Brazilian Mining Company To Pay $55.9 Million To Settle Charges Related to Misleading Disclosures Prior to Deadly Dam Collapse (Mar. 28, 2023).
17 See Press Release, Securities and Exchange Commission, SEC Charges Keurig With Making Inaccurate Statements Regarding Recyclability of K-Cup Beverage Pod (Sept. 10, 2024).
18 See “SEC Abandons ESG Enforcement Group Amid Broader Backlash,” Bloomberg Law (Sept. 12, 2024).
19 See Press Release, Securities and Exchange Commission, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021).
20 See footnote 17.
21 While regulatory focus is expected to decline (at least in the near term) at the federal level, states are increasingly adopting or exploring the adoption of mandatory climate-related disclosure schemes, including associated enforcement processes. See, e.g., “States Making US Climate Reporting Inevitable,” ESG & Climate News (Jul. 19, 2024). In addition, nonregulatory climate-related litigation continues to rise. See, e.g., “Explainer: Climate Litigation – Trends and Impact,” Earth.Org (Sept. 2024).
22 In July 2024, Ernst & Young LLP and Society for Corporate Governance released results from a February 2024 survey of 135 public company members of the Society for Corporate Governance regarding disclosure committee practices and trends. Based on the results, 27% of disclosure committees regularly include review CSR/sustainability matters as part of their scope. While the current survey revealed no increase in representation by the chief sustainability officer on disclosure committees compared with a predecessor survey conducted in 2021, an increase is anticipated as a result of the SEC’s climate-related disclosure rule and other sustainability-related disclosure mandates within and outside the United States that are expected to influence companies’ data gathering and reporting practices. See Ernst & Young LLP and Society for Corporate Governance, Corporate Governance in Focus: Harnessing Disclosure Committees for Modern Reporting (Jul. 29, 2024).
23 In an annual meeting with SEC staff in May 2024, staff advised members of the Society’s Securities Law Committee and Society leadership that companies should be prepared for staff comments that ask them to explain their process for making a materiality determination.
24 As to Scopes 1 and/or 2 GHG emissions specifically, companies should consider the examples included in the SEC Climate Rule release: “A registrant’s Scopes 1 and/or 2 emissions may be material because their calculation and disclosure are necessary to allow investors to understand whether those emissions are significant enough to subject the registrant to a transition risk that will or is reasonably likely to materially impact its business, results of operations or financial condition in the short- or long-term. For example, where a registrant faces a material transition risk that has manifested as a result of a requirement to report its GHG emissions metrics under foreign or state law because such emissions are currently or are reasonably likely to be subject to additional regulatory burdens through increased taxes or financial penalties, the registrant should consider whether such emissions metrics are material under the final rules. A registrant’s GHG emissions may also be material if their calculation and disclosure are necessary to enable investors to understand whether the registrant has made progress toward achieving a target or goal or a transition plan that the registrant is required to disclose under the final rules.” See footnote 1 at page 246.
25 Under the CSRD, companies must assess (1) how their business is impacted by sustainability-related factors (financial materiality) and (2) how their activities impact society and the environment through emissions and employment creation (impact materiality).
26 According to a recent survey of Society public and private company members, Sustainability Consultants and Platforms, over the past two years, 47% of companies represented by 77 respondents used a consultant or advisory firm to assist with their sustainability reporting, and 62% used a consultant or advisory firm to assist with their sustainability materiality assessment/prioritization.
27 According to the S&P 500 ESG Reporting and Assurance Analysis, CAQ (Jun. 2024), 70% of S&P 500 companies that reported ESG information in 2022 obtained assurance over certain of that information (up from 65% in 2021). Additionally, 21% of companies that obtained assurance, obtained assurance from public company auditors (up from 18% in 2021).
28 Although practice may vary by company, according to the Society’s Society Quick Survey: Board Oversight of Climate Risks & Opportunities, May 2024” (May 2024), the highest number of respondents (23 of 58) delegate oversight of climate-related risk to the Nominating and Governance Committee, followed by the Audit Committee and Risk Committee.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
