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Rocky road for SEC climate initiative

While questions abound as to their final form, the Securities and Exchange Commission is expected to adopt some version of ambitious climate disclosure rules proposed last month.

And whatever their final form, securities experts say the forthcoming regulatory regime promises legal challenges by the business community, sleepless nights for compliance officers, and fertile ground for plaintiffs’ attorneys eager to pounce on corporate missteps.

On March 21, the SEC proposed rule changes that would require issuers of securities subject to registration under the Securities Exchange Act of 1934 to include certain climate-related disclosures in their registration statements and periodic reports.

The disclosures required of publicly traded companies would include information about climate-related risks that are “reasonably likely to have a material impact” on a company’s business, operations or financial condition. Moreover, required disclosures would include estimates of a registrant’s greenhouse gas emissions.

Matthew E. Miller, a defense-side securities litigator at Foley Hoag, says he has no doubt the litigation risk for companies will increase if the rules are adopted.

“It’s a simple equation: If you require public companies to make additional disclosures, then additional litigation is likely to follow,” Miller says.

The SEC’s climate initiative marks a “radical departure” from the current climate change related disclosure requirements for public companies, according to Andrew C. Spacone, a retired corporate attorney who teaches securities regulation at Roger Williams University School of Law.

“To put it bluntly, it is a bad rule if only because the increased costs and adverse impact on capital formation will far outweigh the benefits,” Spacone says.

But Owen P. Lynch of Whelan, Corrente & Flanders says he doesn’t think the SEC’s proposal is as radical as some claim.

“In many respects, it’s in line with a broader movement of investor interest in [greenhouse gas] sensitivity,” Lynch says. “It also builds on frameworks that are already in place as far as reporting requirements.”

Joseph Franco says while companies will face challenging regulatory burdens under the proposed rules, the SEC’s climate initiative responds to the demands of today’s investors.

“There is no doubt that in the marketplace today there is much greater appetite among investors to evaluate the [Environmental, Social and Governance] profile of companies,” the Suffolk University Law School professor says. “And just as it is very difficult to manage what you don’t measure, it’s very difficult to actually implement these investment desires unless you somehow have some transparency and culpability about how companies are performing in the ESG space.”

The 506 pages of proposed rule changes are subject to a comment period that ends 30 days from the date of their publication in the Federal Register or on May 20, whichever is later. (As of press time, the SEC’s proposal had not been published in the Federal Register.)

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