On Monday, March 21, 2021, the Securities Exchange Commission released a 510-page proposal that would require U.S.-listed companies to provide certain climate-related information in their registration statements and annual reports. This long-anticipated draft rule coupled with increased investor demands for information about climate-related risks would significantly impact corporations and place them under an even more watchful eye of the SEC.[1]

The SEC’s proposal of disclosing climate-related financial risks, metrics, and data such as greenhouse gas emissions, aims to create a more uniform system for consistent, and reliable climate disclosures while additionally enhancing the SEC’s mission to protect investors. As it stands today, registrants often provide climate-disclosure information outside of SEC filings, in varying degrees of completeness, and in different documents and formats – meaning the same information may not be accessible to investors across different companies. Apart from registrants’ financial disclosures, the separate materials pertaining to climate-risk disclosures could create confusion for investors to determine whether a company’s financial disclosures are consistent with its climate-related disclosures.[2]

The new proposal calls for detailed disclosures on climate-related information, including information about climate-related risks that are reasonably likely to have material impacts on a registrant or its consolidated financial statements. Some of these disclosures include: (i) the oversight and governance of climate-related risks by the registrant’s board and management; (ii) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (iii) the registrant’s process for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or process.

The broad disclosures in the SEC’s proposal are faced with mixed views. From a corporation standpoint, companies will have to individually assess their needs and employ some combination of board input, in-house reporting teams, and individuals with climate-related expertise to satisfy these requirements – all while increasing compliance costs.[3] On the other hand, investors are largely supportive of the proposal. The proposed requirements would enhance shareholders’ ability to make more informed investment and proxy voting decisions.[4]

In securities litigation, this new proposal could pave the way towards more derivative actions by providing plaintiffs with an additional avenue to search for board mismanagement and oversight with respect to a registrant’s climate-risk information and company procedures. Additionally, the new proposal creates a means by which registrants can mislead or omit information about their climate-related risk disclosures, thus creating claims arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  If you have any questions regarding this proposal or potential securities litigation and would like to speak with one of Lowey’s securities litigation attorneys, please contact Alesandra Greco (agreco@lowey.com) at 914-733-7272.

[1] The Enhancement and Standardization of Climate-Related Disclosures for Investors, SEC Release No. 33-11042, (proposed Mar. 21, 2022) (to be codified at 17 CFR 210, 229, 232, 239, and 249) available at https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[2] Id.

[3] SEC Climate Plan Would Unleash Flood of Demands on Cos., LAW360, https://www.law360.com/securities/articles/1476346/sec-climate-plan-would-unleash-flood-of-demands-on-cos- (Mar. 22, 2022).

[4] Companies Brace for Higher Compliance Costs as SEC Proposes Climate Disclosures, The Wall Street Journal, https://www.wsj.com/articles/companies-brace-for-higher-compliance-costs-as-sec-proposes-climate-disclosures-11647941400?mod=hp_minor_pos8 (Mar. 22, 2022).