Some readers may recall that the proposed climate rules required the new Reg. S-K disclosures be included in a separately captioned section titled “Climate-Related Disclosure” in a registration statement or annual report. In the final release, the SEC opted to give registrants some flexibility as to the placement of the climate-related disclosures under Reg. S-K but suggested that cross references in a separately captioned section may improve usability. For example, here is the addition to Form 10-K:
Part II
* * * * *
Item 6. Climate-Related Disclosure
Provide the disclosure required by subpart 1500 of Regulation S-K (17 CFR 229.1500 through 229.1507) in a part of the annual report that is separately captioned as Climate-Related Disclosure. A registrant may include disclosure that is responsive to the topics specified in Items 1500 through 1507 of Regulation S-K in other parts of the annual report (e.g., Risk Factors, Business, or Management’s Discussion and Analysis), in which case it should consider whether cross-referencing the other disclosures in the separately captioned section would enhance the presentation of the climate-related disclosures for investors.
In support of this decision to allow flexibility in placement, the SEC noted that the structured data requirements will facilitate investors’ ability to identify and compare climate-related disclosures, regardless of where they are placed — since, of course, the disclosures are required to be tagged in Inline XBRL.
Well, that didn’t take long. As reported by The Hill, within hours of adoption — while thousands of lawyers, accountants and sustainability professionals were just starting to read the 886 pages of the release — ten Republican-led states filed a petition for review in the 11th Circuit. The petition states that “the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law” and asks the 11th Circuit to declare the rule “unlawful and vacate the Commission’s final action.”
During the open meeting, Commissioner Lizárraga noted in his supporting statement, “With the broad interest this rulemaking has received, inevitably, some will view it as having gone too far, while others will see it as not having gone far enough.” That may have been prescient. The Hill gives the perspectives of two environmental groups and notes that legal challenges may come from both sides of the aisle:
The influential environmental groups Sierra Club and Earthjustice also announced they are weighing their own legal challenge to the SEC’s “arbitrary removal” of the so-called “Scope 3” provisions that would have required disclosure of emissions from a company’s supply chain and the use of its products.
As a reminder, the SEC proposed climate-related disclosure rules in March 2022, then reopened the comment period in May, and again in October of that year. We previously reported that the SEC had received 15,000+ comments on this proposed rulemaking, but Chair Gensler updated this number to 24,000+ comments, noting that the Commission received a flurry of additional comments in the 72 hours leading up to the open meeting.
I’m sharing a high-level overview here — starting with the new Regulation S-K requirements — pulling from the fact sheet. The final rules create a new subpart 1500 of Regulation S-K that requires public companies to include the following climate-related disclosure in their Exchange Act reports and registration statements:
– Climate-related risks: (1) 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, (2) the actual and potential material impacts of those risks, (3) a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from mitigation or adaptation activities and (4) specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk or assess the impact of climate-related risks including the use, if any, of transition plans, scenario analysis, or internal carbon prices.
– Governance of climate-related risks: (1) Oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks, (2) the processes the registrant has for identifying, assessing, and managing material climate-related risks and (3) if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
– Targets and goals: Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, including material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal.
– Emissions data and third-party assurance: (1) For large accelerated filers and accelerated filers that are not otherwise exempted, information about Scope 1 emissions and/or Scope 2 emissions, if material, and (2) for those required to disclose Scope 1 and/or Scope 2 emissions, an attestation report at the limited assurance level and, for large accelerated filers, following an additional transition period, at the reasonable assurance level.
The GHG emissions data requirement differs significantly from the proposed rules — note the absence of Scope 3 and the decision to limit Scopes 1 and 2 to large-accelerated filers and accelerated filers only when material. Tomorrow, we’ll cover some other key differences from the proposal. Also, check out Lawrence’s blog on PracticalESG.com for more details on the assurance and assurance provider aspects of the rules.
The final rules also create a new Article 14 of Regulation S-X that requires the following disclosures in the notes to a company’s financial statements:
– The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable 1% and de minimis disclosure thresholds (a registrant is not required to make a determination that a severe weather event or other natural condition was caused by climate change to trigger disclosure).
– The capitalized costs, expenditures expensed, and losses related to carbon offsets and RECs if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals.
– If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted.
As detailed memos become available, we’ll post them in our “Climate Change” Practice Area, so be sure to check that out in the coming days and weeks.
The climate disclosure rules will become effective 60 days after publication in the Federal Register. But, in a change from the proposed rules, the phase-in periods were significantly extended in some cases — depending on filer status and the contents of the disclosure. The fact sheet includes this table showing the compliance dates for the new disclosure requirements by filer type:
Compliance Dates under the Final Rules(1)
RegistrantType
Disclosure and Financial Statement
Effects Audit
GHG Emissions/Assurance
Electronic Tagging
All Reg. S-K and
S-X disclosures, other than as noted in this table
Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2)
Item 1505 (Scopes 1 and 2 GHG emissions)
Item 1506 – Limited
Assurance
Item 1506 –
Reasonable
Assurance
Item 1508 – Inline XBRL tagging for subpart 1500(2)
LAFs
FYB 2025
FYB 2026
FYB 2026
FYB 2029
FYB 2033
FYB 2026
AFs (other than SRCs and EGCs)
FYB 2026
FYB 2027
FYB 2028
FYB 2031
N/A
FYB 2026
SRCs, EGCs, and NAFs
FYB 2027
FYB 2028
N/A
N/A
N/A
FYB 2027
1 As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed.
2 Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.
The first disclosures will be required of large accelerated filers covering fiscal years beginning in calendar 2025. Page 590 of the final rule release details this example:
[A]n LAF with a January 1 fiscal-year start and a December 31 fiscal year end date will not be required to comply with the climate disclosure rules (other than those pertaining to GHG emissions and those related to Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2), if applicable) until its Form 10-K for fiscal year ended December 31, 2025, due in March 2026.
If required to disclose its Scopes 1 and/or 2 emissions, such a filer will not be required to disclose those emissions until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026. Such emissions disclosures would not be subject to the requirement to obtain limited assurance until its Form 10-K for fiscal year ended December 31, 2029, due in March 2030, or in a registration statement that is required to include financial information for fiscal year 2029. The registrant would be required to obtain reasonable assurance over such emissions disclosure beginning with its Form 10-K for fiscal year ended December 31, 2033, due in March 2034, or in a registration statement that is required to include financial information for fiscal year 2033.
If required to make disclosures pursuant to Item 1502(d)(2), Item 1502(e)(2), or Item 1504(c)(2), such a filer will not be required to make such disclosures until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026.
Items 1502(d)(2), (e)(2) and 1504(c)(2) require disclosures of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from activities to mitigate climate-related risks, from the company’s transition plan or from targets or goals or actions taken to meet any targets or goals. The SEC provided an additional phase-in period for these disclosures in recognition that registrants may need to develop systems and update disclosure controls to accommodate the tracking and reporting of these expenditures and impacts.
FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.
The implication being that FinCEN will continue to enforce the CTA with respect to other entities. The March 1 as of date in FinCEN’s announcement also clarifies that joining the NSBA after the March 1 decision will not shield those new members from enforcement.
This is consistent with some conversations that were already happening on LinkedIn and takeaways in client alerts. This Morgan Lewis memo notes the following:
The injunction against enforcement only applies to the plaintiffs in the Alabama litigation, and despite the holding that the CTA is unconstitutional, the government is entitled to continue to enforce the statute against other entities.
As a result, our recommendations to companies regarding the CTA remains unchanged. Until clearer guidance is provided, companies should continue to comply with the CTA’s BOI reporting requirements.
As Dave shared, the Small Business Capital Formation Advisory Committee met last week Tuesday to discuss the accredited investor definition (again) and the state of the IPO market. During the meeting, a number of the Commissioners shared prepared remarks — each of which is discussed in this blog from “Jim Hamilton’s World of Securities Regulation.” Following the prepared remarks, the Committee voted in favor of three recommendations, which this Mayer Brown blog summarizes as follows:
– The current net worth and income thresholds in the definition should not be indexed for inflation;
– Non-accredited investors should be permitted to invest up to five percent of their income or net worth in private offerings annually if they meet certain sophistication criteria or pass a certification exam; and
– The SEC should require a risk statement to be included in private placement documents.
In terms of next steps, the blog says the SEC is expected to consider amendments to the definition during the course of this year, including the Committee’s recommendations, the SEC Staff report and any comments submitted in response to the report.
In January, Liz shared this Locke Lord blog explaining why the “public company” exemption for the Corporate Transparency Act isn’t enough to insulate public companies from having to conduct a compliance review for all subsidiaries or investment entities and install new internal controls. And since public companies are unlikely to have benefited from the limited injunction in National Small Business United v. Yellen (N.D. Ala.; 3/24), preparing for CTA compliance is still necessary — for now — if and until there’s a national injunction or further guidance is provided.
In the latest Timely Takes Podcast, John speaks with Rob Evans and Ryan Last of Locke Lord for more on public company CTA compliance. In the podcast, Rob and Ryan discuss when the CTA applies, set forth the key dates and then identify tasks involved in preparing a public company for compliance with the CTA going forward, giving a framework that public company counsel may consider for CTA compliance.
In the latest “Deep Quarry” newsletter, Olga Usvyatsky shares takeaways from SEC comment letters to sixteen companies issued between January 2023 and February 2024 focused on adjustments for legal expenses in non-GAAP numbers. She found that the companies receiving these comments had some common characteristics:
– Involvement in a mix of routine and non-routine legal cases;
– A high impact of litigation charges on the non-GAAP bottom line;
– A generic title of the non-GAAP line that does not specify which cases are excluded in the non-GAAP calculations.
The blog then discusses in detail the treatment of IP-related litigation costs — particularly for companies with businesses that would ordinarily involve IP litigation — and whether adjusting for those costs is appropriate under Regulation G. It cites an instance where the SEC disagreed with the company’s arguments that litigation expenses were non-routine due to the “size, scope, complexity and frequency.” The SEC focused on the fact that IP litigation arises in the ordinary course given the nature of the company’s business and products.
But even for companies where IP-related litigation is common, the analysis remains very fact-intensive. The newsletter describes another comment letter where the company successfully argued that an adjustment was appropriate for one specific IP matter. The blog highlights that the company treated costs associated with all other IP litigation matters as ordinary course and did not adjust for them in non-GAAP measures.
This Public Chatter blog from Perkins Coie discusses something you’ll likely encounter (or have encountered) at some point in your career — a non-executive director has a personal matter that may make it difficult for them to continue in their role. The blog gives examples of a director needing a medical procedure or taking time to care for a family member. Directors are people and, as the blog says, “life happens.” What options are open to the company and the director in this case?
As the blog notes, the availability of virtual attendance has allowed directors unable to travel to continue to attend meetings and fulfill their fiduciary duties, and happily, it’s no longer unusual for directors to attend virtually, even if most of the board is together in one room.
When the director’s circumstances involve more than just an inability to travel, the concept of a director leave of absence may arise. Here’s what the blog says on that:
State Law Allows a Director to be “In” or “Out”: No Middle Ground. You’ll be looking to state law – in the state in which your company is incorporated – and when you look, I doubt a leave of absence would be allowed under state law since directors are elected and then remain on until the end of their term (or until resignation). A director isn’t like an employee who could take a paid or unpaid leave. Instead, a director has fiduciary responsibilities from the moment of election or appointment, until the moment of resignation.
So don’t think you could give a director a valid leave of absence under state law that would relieve the director of fiduciary duties during the leave. And taking a “leave” would in effect prevent the director from actively fulfilling those duties.
It’s also not possible to get around this with a sort of temporary resignation:
Directors Can’t Resign With a Promise to Renominate Them. If a director is going to be totally unavailable for a year, they should resign and stay in touch if they want to – but with no promise of nomination a year later.
When that director says they are ready to rejoin the board, the nominating committee must evaluate the board’s needs at that time. Because of the importance of creating a board whose members, as a whole, match the challenges that the corporation is then facing, the former director’s skills and background would need to be reassessed at that future date. Or perhaps the board size is such that there simply isn’t a need to enlarge the board by one at that time. It is what it is.
Proxy disclosure is an important consideration when determining whether the director’s circumstances permit continued meaningful participation virtually or whether a resignation is more appropriate. The blog says that any directors faced with personal issues that may make it challenging to attend even virtual meetings should be reminded of the obligation to disclose attendance of less than 75% of the meetings of the board and each applicable committee in the year. If the resignation route is pursued and the board may consider a future renomination, the blog suggests that the company may want to note that in the resignation 8-K.
