September 19, 2022

Climate Disclosure: Litigation Risks & Challenges

The potential risks of litigation that might arise out of the SEC’s climate change proposals are among the greatest concerns that public companies & their advisors have about the adoption of these sweeping new disclosure obligations.  This Cleary memo provides an overview of some of the specific federal and state claims that might arise under the new disclosure regime, and also discusses some of hurdles that plaintiffs might face in bringing those claims. This excerpt addresses the challenges of establishing the “materiality” of the new disclosures:

At least in the near term, the materiality element may pose the most significant challenge for potential plaintiffs. Disclosures are considered “material” for these purposes if there is a substantial likelihood that a reasonable investor would consider the disclosed information important in deciding how to vote or make an investment decision. Under this standard, the impact of any given piece of information on a company’s stock price generally is a key element of the materiality analysis under current law.

But it is not clear that the market would necessarily consider all of the disclosures required by the SEC’s proposed rules to be important so as to make them “material” under this historical test. Indeed, certain disclosure requirements seem to be based not on what a “reasonable investor” would view as important, but instead on what general stakeholders and the greater public would find significant. For example, the Scope 3 emissions disclosures seem to be based on general concern over climate accountability, rather than the company’s own long-term financial value.

I think this is a great point, but there’s also some authority out there to the effect that information required by SEC line-items is presumptively material. See, e.g., Howing Co. v. Nationwide, (6th Cir. 1991); In re Craftmatic Securities Litigation, (3d. Cir. 1989) (“[d]isclosures mandated by law are presumably material”). Like the author of this law review article, I think these courts are confusing materiality with the duty to disclose, but as Sgt. Phil Esterhaus used to say in the great 1980s cop drama Hill Street Blues – “let’s be careful out there.”

Cleary’s memo doesn’t address claims that the SEC’s proposed climate disclosure rules are unconstitutional, but this recent WSJ opinion piece shows that opponents of the proposal continue to make that argument.

John Jenkins