The U.S. Securities and Exchange Commission (SEC) recently finalized its landmark Enhancement and Standardization of Climate-Related Disclosures for Investors rule, aimed at mandating climate-related disclosures by public companies. This long-anticipated regulation represents a significant step in addressing climate risks in corporate reporting. However, the rule has already sparked intense legal challenges, temporarily blocking its implementation and creating uncertainty about its future.

Background: The Need for Reform

In 2010, the SEC issued guidance recommending that companies disclose climate-related risks, but compliance was inconsistent and fragmented. The guidance left much to interpretation, and most climate-related information was reported outside SEC filings. To address this, the SEC proposed a more comprehensive rule in 2021 that would mandate specific disclosures, including greenhouse gas (GHG) emissions metrics and the impact of climate risks on financial performance.

The 2021 proposal, known as the Proposed Rule, sparked significant debate. It required companies to report Scope 1 (direct) and Scope 2 (indirect from energy sources) emissions and, in some cases, Scope 3 emissions (indirect emissions from a company’s value chain). The SEC received over 22,000 public comments—the most in its history—reflecting widespread interest and controversy.

The Final Rule: Key Provisions

The finalized rule builds on the SEC’s earlier proposal but incorporates significant changes after public feedback. Notably, the Final Rule:

  • Requires climate-related disclosures: Companies must report risks that are reasonably likely to materially affect their business. These include strategies to manage climate risks, governance oversight, and financial impacts of severe weather events.
  • Focuses on material emissions: Disclosure of Scope 1 and Scope 2 emissions is now limited to certain larger registrants and only if material, with phased implementation and attestation requirements.
  • Excludes mandatory Scope 3 reporting: Unlike the proposed rule, the Final Rule does not mandate Scope 3 emissions disclosure, avoiding a contentious area of reporting.
  • Aligns with global frameworks: The requirements track standards set by the Task Force on Climate-Related Financial Disclosures (TCFD), promoting alignment with international reporting frameworks.

While the rule scales back some proposed requirements, it still aims to create consistency and comparability in how companies disclose climate-related risks.

Legal Challenges and Temporary Stay

The Final Rule has met fierce resistance from various quarters, including:

  1. State lawsuits: A coalition of 10 states filed a lawsuit alleging that the SEC exceeded its statutory authority and imposed unreasonable burdens on companies.
  2. Industry pushback: Business groups and companies argue that compliance costs and reporting requirements are overly burdensome, particularly for smaller entities.
  3. Environmental criticism: Advocacy groups contend that the rule does not go far enough, allowing companies to selectively report risks and emissions.

On March 15, the Fifth Circuit Court of Appeals issued a temporary administrative stay, blocking the rule from taking effect in response to a lawsuit by Liberty Energy. Petitioners argued that while full compliance might not be required until 2026 or 2027, preparatory efforts based on 2025 data were already underway, creating an immediate burden.

The SEC has challenged this stay, emphasizing that the rule’s phased implementation allows companies ample time to comply. Nevertheless, the legal challenges have introduced uncertainty about the rule’s fate.

Broader Implications for Companies

Despite the legal roadblocks, many companies are proactively preparing for enhanced climate disclosures. Investor demand for transparency on climate risks continues to grow, and multinational companies face overlapping regulatory obligations from:

  • The European Union’s Corporate Sustainability Reporting Directive (CSRD): Requires detailed climate disclosures for EU entities and non-EU companies with significant EU operations.
  • California’s Climate Corporate Data Accountability Act (CCDA): Mandates climate disclosures for large corporations operating in the state.

Given these parallel developments, many firms are integrating climate risk management into their operations to align with multiple frameworks and address stakeholder expectations.

Looking Ahead

The future of the SEC’s climate disclosure rule remains uncertain, pending judicial review and potential political shifts. However, the broader movement toward mandatory climate-related disclosures is unlikely to be reversed. As global regulatory frameworks converge and investor expectations evolve, climate reporting is becoming an essential aspect of corporate governance.

While legal challenges may delay the SEC’s rule, they also highlight the growing importance of robust climate disclosure practices in managing risk, attracting investment, and navigating a rapidly changing regulatory landscape.