April 2022 Business Litigation Update

On March 21, 2022, the SEC released its long-anticipated rules aimed at increasing the “climate-related” disclosures public companies would have to make in their public filings.  While these are just proposals, the rules, if adopted, would require specific and extensive disclosures regarding the climate-related risks that a public company faces and how it intends to manage those risks.

For example, public companies would be required to include information in their SEC filings describing their “oversight and governance of climate-related risks.”  Companies that use carbon offsets will have to disclose and quantify that.  Companies would also need to outline any transition plans they have developed and provide data on certain greenhouse gas emissions linked to the company’s operations, including, in some circumstances, disclosing emissions that result from a third party activities, such as emissions from a supplier.  This type of data, in particular, could be extremely difficult for a company to acquire and verify before publicly reporting.

The SEC’s rules are in the public comments phase, and the agency will likely receive a great deal of response.  But companies should prepare now for some variation of these rules to be implemented.  And, professional service providers like accountants and engineers should examine ways they can help their public company clients satisfy these new requirements.

Lastly, these rules will provide yet another way for disgruntled investors (and their lawyers) to sue for federal securities fraud.  As Bloomberg’s Matt Levine noted in a recent column: “If the SEC tells you to write some climate disclosures and put them in your annual report on Form 10-K, and those climate disclosures are wrong, you will get very sued.”

Given the trend towards “event-driven” securities fraud claims discussed last month, it is just as likely that future securities fraud litigation over these new requirements will arise out of a climate-related disclosure that a company failed to make, as opposed to one that turned out to be incorrect – e.g., a company’s chemical refinery emits noxious gases causing severe injury to nearby residents.  The company’s stock price drops on the news.  Next, securities fraud lawsuits are filed because the company failed to disclose the likelihood of this “climate-related” event in its 10-K.

By mandating climate-related disclosures, the SEC is giving investors another arrow in their litigation quiver, as well as exposing public companies to increased risk of strike-suits, legal fees, and the distraction that comes with defending a lawsuit.  An unintended consequence, perhaps.  But a consequence, nonetheless.

While the SEC’s rules will likely have some revisions and could, of course, face legal challenges, we can expect to see some form of them implemented.  The rules would be rolled out in stages, but as with any new regulations these will require significant preparation and work for most public companies.