As I discussed at the time (here), in March 2022, the SEC published proposed climate-related disclosure guidelines. The agency’s proposal is now in the public comment period, and it remains to be seen in what form the guidelines will be put into effect. However, it seems probable that that the guidelines will be implemented in some form, despite concerns expressed in public comments so far. If the rules are put into effect in some form close to the initial proposal, there will be a risk that claimants may seek to rely on the guidelines in connection with future corporate and securities lawsuits. A detailed and interesting September 12, 2022 memo from the Cleary Gottlieb law firm (here) discussed the possibility that the climate change disclosure guidelines could give rise to a host of potential future litigation risks. (Hat tip to the TheCorporateCounsel.net blog for the link to the law firm memo.)
As detailed in the SEC’s March 21, 2022 press release (here) and fact sheet (here), the new proposed climate change disclosure proposal would put a number of changes into effect. Among other things, the new guidelines would require reporting firms to include a new section in their annual reports and registration statements, in which the companies would be required to disclose climate-related disclosures concerning governance, risk, business impacts, targets, and goals; the company’s greenhouse gas emissions with respect to Scope 1 emissions (the company’s own emissions), Scope 2 emissions (emissions from the company’s energy providers), and, where relevant, Scope 3 emissions (emissions from the company’s vendors and customers); and financial statement disclosures pertaining to climate-related metrics.
Among the many concerns that have been expressed with respect to the proposed guidelines, the possibility that the disclosure guidelines could lead to litigation based on alleged misrepresentations or omissions in climate-related disclosure is among the most prominent. As the law firm memo details, the potential litigation that could be filed in reliance on the disclosure guidelines includes securities claims made in reliance on the federal securities laws and shareholder derivative lawsuits filed in reliance on state common law.
With respect to the potential federal securities law related lawsuits, prospective claims against companies whose securities trade on the open market could include claims based on alleged violations of Sections 10(b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b. With respect to claims relating to the issuance of shares into the market, whether through an IPO or a subsequent share offering, prospective suits could include claims alleging violations of Sections 11, 12(a), and 15 of the Securities Act of 1933.
As the law firm memo notes, because the SEC’s proposed climate-related guidelines require additional disclosures in a company’s annual reports and in registration statements, “these new disclosures could provide additional statements for investors to challenge as misrepresentations and omissions under federal securities laws.” As the memo’s authors note, even before the guidelines were proposed, claimants have been pursuing claims based on, among other things, natural disasters, oil spills, and other corporate events. Given the rise of this type of litigation, “it seems likely that plaintiffs will challenge climate-related disclosures made under the proposed rules by companies that experiences similar catastrophic events claiming the climate-related disclosures were inadequate because they failed to adequately disclose the conditions that led to the events.” It is also possible that “inaccuracies in the metrics required to be disclosed under the SEC’s proposal could give rise to securities liability.”
Any claims of this type would of course be subject to defenses. In particular, prospective claimants would have to overcome the significant challenge of establishing materiality. In addition, many of the statements on which the claimants might seek to rely could be eligible for the protection of the safe harbor for forward looking statements. Indeed, the proposed guidelines requirements concerning Scope 3 greenhouse gas emissions includes its own safe harbor.
With respect to the prospective claimants’ potential shareholder derivative claims based on state law, such as a claim against directors and officers alleging they breached their fiduciary duties, resulting in harm to the company. There have already been shareholder derivative lawsuits based on companies’ alleged failures to meet company specific or more general goals, such as board diversity. The law firm memo notes that “it is possible that the new disclosures required by the SEC’s proposed rule could provide additional ammunition for such suits challenging failures to meet announced climate change goals.”
Like the potential securities law claims, potential shareholder derivative suits would also face prospective defenses, including the need to meet the demand futility requirement and the business judgment rule.
In short, the memo concludes, if the SEC adopts guidelines in the current or substantially similar form, “there are a number of litigation risks that could arise from the required disclosures, including securities litigation, shareholder derivative claims, and other state law torts.” However, each of the potential claims also would present a number of legal obstacles that could limit a plaintiff’s ability to prove these claims.
The law firm’s memo is interesting and worth reading at length. However, one big caveat that should be kept in mind at this point is that until the final guidelines are release (expected sometime this fall), the extent of the disclosure requirements will not be known with certainty. The scope of the potential litigation risk will not be fully brought into focus until the final guidelines are release.
Another consideration that should be kept in mind is that, whatever form the final guidelines take, the guidelines will almost certainly face legal challenge. As discussed here, as a result of the U.S. Supreme Court’s landmark decision in the last days of June in the carbon emissions rulemaking case, groups challenging the SEC’s rules have a potentially potent new tool to use to try to block new regulatory requirements.
In the Court’s June 30, 2022 opinion by Chief Justice John Roberts in West Virginia v. EPA (here), a 6-3 majority of the Court struck down Environmental Protection Agency (EPA) rules on the grounds that the agency had exceeded its authority when it promulgated the Clean Power Plan, which provided requirements for utilities to reduce carbon pollution from power plants.
As its rationale for striking down the agency’s regulatory program, the Court relied on the “major questions” doctrine, which holds that in “extraordinary cases” involving matters of “great economic and political significance,” federal agencies must rely on specific Congressional authorization for their actions. Courts, the Supreme Court said, should be “skeptical,” of agencies’ assertions that they have broad policy-making authority. The court’s rationale and language could both provide a road map for litigants challenging the SEC’s authority to, as the litigants are likely to put it, regulate climate change through disclosure requirements.
But while all of these cautionary notes are important and should be given appropriate weight, the concerns about potential future claims based on alleged violations of the SEC’s prospective adoption of climate-related disclosure guidelines are substantial and should be taken into account when the SEC guidelines are put into effect later this fall. The possibility of these types of claims should be a major consideration in any assessment of future corporate and securities litigation risks.