As we await the final climate-related risk disclosure rule from the Securities and Exchange Commission (SEC), we are seeing a clear demand for transparency about corporate climate commitments, greenhouse gas (GHG) emissions, and climate risks in the US and abroad. This pressure comes from new state legislation, other countries in which US companies operate, notably the European Union, and growing litigation risks. The SEC’s final climate risk disclosure rule, expected in fall 2023, would be consistent with this already-underway transition.
Even with voluntary climate targets, corporations see potential legal and reputational risks related to target setting and engaging in climate-related activities more generally. For example, as of March 2023, at least 14 S&P 500 companies have cited “greenwashing” as a risk in their 10-K annual reports to the SEC compared to five companies in 2022 and zero companies in 2020, according to Bloomberg. Underlying this risk may be the fact that many corporate leaders are concerned about whether they are setting climate targets that they will be unable to meet.
Regardless of the final SEC climate disclosure rule, companies will need to continue to respond to the call from a range of stakeholders including investors and consumers for increased transparency about climate commitments and climate risks as well as new regulations and litigation risks.
State action underway In September 2023, the California legislature passed two climate disclosure bills that Governor Newsom plans to sign into law. The Climate Corporate Data Accountability Act (SB 253), a bill that will require corporations doing business in the state with annual revenue of more than $1 billion to report their scope 1, 2, and 3 greenhouse gas emissions. A second bill, the Climate-Related Financial Risk Act (SB 261), would require public and private firms with more than $500 million in gross revenues to produce a “climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk.” California’s requirements are designed to work with EU disclosure regulations and allow for companies to supply comparable federal reporting once the SEC rule is finalized. However, these bills go farther than the SEC proposal in two ways: first, they require reporting from all businesses “doing business” in the state that meet the revenue threshold, which includes private companies, not just public companies like the SEC proposal; and second, they require scope 3 reporting from all companies, not just a subset as in the SEC proposal. Given that California is the fifth largest economy in the world, these proposals will affect thousands of companies, including private companies not covered by the SEC’s proposal.
European Union and other international activity The EU’s Corporate Sustainability Reporting Directive, which became effective in January 2023, expanded the climate information that covered companies will need to report starting in 2024. The directive will cover thousands of firms operating in the EU, including most large multinational corporations. And in June 2023, the independent International Sustainability Standards Board issued the first iteration of its standards for climate-related disclosures, designed to be “high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.”
Litigation risk is growing Recently, a consumer in California filed a class action lawsuit against Delta claiming that the airline misrepresented itself as carbon neutral despite its reliance on offsets. Companies are seeing legal risk related to unsubstantiated net zero and other climate commitment claims under false advertising, consumer protection, and securities law. Some of these lawsuits demonstrate that the public wants accountability and greater transparency from corporations making statements about their climate ambitions.
Federal action anticipated this fall The SEC’s climate-related risk disclosure rule, proposed in March 2022, would improve corporate transparency related to climate risk for investors, require publicly traded companies to disclose information about climate-related financial risks—such as economic or operational risks associated with climate-amplified extreme weather or risks associated with transition-related market shifts—that are likely to have an impact on their business, as well as disclosure of any climate goals or planning processes that a company has developed in response to climate risks. The rule also proposes to require companies to report their greenhouse gas emissions since investors have indicated interest in better understanding a regulated entity’s transition risks. The SEC states that its goal for this rule is to provide “consistent, comparable, and reliable – and therefore decision-useful – information to investors.” Ensuring that climate risk-related information is available to investors is core to the SEC’s statutory authority and a response to increasing investor demand for this information.
As the SEC works to finalize its proposed climate risk disclosure rule this fall, there are some key questions EELP will be evaluating once the rule is released:
- Are greenhouse emissions scopes 1, 2, and 3 included in the final rule? What is the agency’s argument for including or not including scope 3?
- What is the reporting threshold for climate-related financial impacts on financial statement reporting? If it is changed from proposed rule, what is the rationale?
- How does the SEC demonstrate that the rule is within its statutory authority, tradition, and expertise to mitigate major questions doctrine risk in the final rule?
You can follow along on our Financial Regulation, Climate Change, and Climate-related Risk Disclosure Regulatory Tracker page and keep an eye out for more EELP analyses this fall.
 Andrew Ramonas, BlackRock, United Join Growing Club citing Greenwashing Risk, Bloomberg Law (April 3, 2023), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/esg/BNA%2000000187-3452-d8fb-abcf-b47b3c650001?isAlert=false.
 For example, in a Baker MacKenzie survey, 40 percent of business leaders surveyed reported that they believed their organizations were unable to meet the targets they set, and over half reported that their organizations had not allocated enough of budget to make the transition to net zero successful. Baker McKenzie, The Race to Net Zero: Is the global business community on course to beat the clock? (2022), https://insight.bakermckenzie.com/race-to-net-zero/p/1.
 Climate Corporate Data Accountability Act (SB253),https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB253.
 “Doing business” in California is defined as “engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively.” Revenue and Tax Code (RTC) § 23101; see also California Senate Rules Committee, Office of Senate Floor analyses, SB 253 (May 23, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB253.
 A Senate report estimates 5,344 companies fall into this revenue threshold and will have to report. California Senate Rules Committee, Office of Senate Floor analyses, SB 253 (May 23, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB253.
 Greenhouse gases: climate-related financial risk (SB261), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB261.
 A report from the California Senate noted that over 10,000 companies fall into this revenue threshold and 20% of these are public companies. California Senate Rules Committee, Office of Senate Floor analyses, SB 261 (May 23, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB261.
 Directive 2022/2464 of the European Parliament and of the Council amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Dec. 14, 2022), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464.
 International Sustainability Standards Board, https://www.ifrs.org/groups/international-sustainability-standards-board/.
 The plaintiff argues that she and others paid more for Delta flights on the belief that their flights were carbon neutral, but that these claims were false and misleading. The complaint contends that Delta violated California’s Consumers Legal Remedies Act, the state’s False Advertising, Business and Professions Code and the Business and Professions Code. Berrin v. Delta Air Lines, Inc., C.D. Cal., No. 2:23-cv-04150.
 Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors (2022), https://www.sec.gov/rules/proposed/2022/33-11042.pdf.