Public companies and their advisors have been struggling with what to disclose about climate-related matters in their SEC filings for decades now, and the SEC’s action on Friday to propose to rescind the 2024 climate-related disclosure requirements will not necessarily change anything about that struggle. While the line-item disclosure requirements of the SEC’s climate-related disclosure rules would have brought some certainty to that ongoing struggle, it was obviously never meant to be, as litigation and a change in Administration doomed any chance of those requirements seeing the light of day.

It is important to note that the SEC’s action to rescind the climate-related disclosure rules will take some time. The proposing release indicated that there will be a 60-day public comment period following publication of the proposing release in the Federal Register, and then it will inevitably take time for the Commissioners and the Commission Staff to consider those public comments and prepare an adopting release. All told, that process could take another six to nine months or so, such that adoption of the amendments rescinding the rules may not even happen this year.

In the meantime, one important thing for companies and advisors to note from the proposing release is that the Commission relied on the 2010 guidance about climate-related disclosures as a basis for rescinding the new rules, stating:

When climate change or other environmental issues, including transition risk, have materially affected the operations or financial performance of a specific company, existing disclosure rules require discussion of the effects. Indeed, the Commission’s Guidance Regarding Disclosure Related to Climate Change lists a variety of specific existing disclosure obligations that, depending on the particular circumstances of a company, could require disclosure of climate change matters. For example, Item 303 of Regulation S-K requires, among other things, a company to disclose and discuss any known trend or uncertainty that has had a material positive or negative consequence for the company’s results of operations. The fact that existing disclosure obligations already serve to provide investors with material information about climate-related matters reinforces the conclusion that the Final Rules are not “necessary” to protect investors. Indeed, they may even serve to harm investors by eliciting information about climate-related matters that goes well beyond what a reasonable investor needs to make an informed investment decision.

The proposing release goes on to note:

Similarly, the Final Rules contrast with the approach taken by the Commission in the 2010 Guidance, when it explained that, in certain circumstances and for some companies, regulatory, legislative, and other developments related to climate change “could have a significant effect on operating and financial decisions.” 2010 Guidance at 6291. As such, the Commission’s existing disclosure requirements—like those that require disclosure of a registrant’s description of its business, legal proceedings, risk factors, and management’s discussion and analysis—might apply to climate-related issues. In contrast to the Final Rules, these prior initiatives are consistent with the Commission’s long-held recognition that types of information “which are of importance only in certain circumstances have generally not been made the subject of specific disclosure requirements.”

With these and other statements in the proposing release, the Commission clearly signals that the 2010 climate change guidance remains in effect (and likely will continue to remain in effect), such that consideration of climate-related issues is still an important element of the overall disclosure process. For example, the 2010 guidance highlighted four disclosure areas where climate-related disclosure issues may arise for public companies:

– Item 101 of Regulation S-K, which requires a company to disclose material effects of compliance with environmental laws that have been “enacted or adopted.”

– Item 103 of Regulation S-K, which requires a description of “any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party.”

– Item 105 of Regulation S-K, which requires a company to discuss risk factors.

– Item 303 of Regulation S-K, which requires disclosure of “known trends, events, demands, commitments, and uncertainties” that are reasonably likely to have a material effect on a company’s “financial condition or operating performance.”

This leads us to conclude that while the SEC’s action to rescind the rules is pending – and probably even after the rules are rescinded – the status quo of the past 16 years will continue to prevail, and we will be left to our own devices to consider the materiality of climate-related matters under the existing framework of the SEC’s line item disclosure requirements, unless of course those line items also change as part of the SEC’s efforts to revamp the disclosure system.

– Dave Lynn