Introduction
On March 6, 2024, the Securities and Exchange Commission (the “SEC”) issued final rules mandating the
content of climate risk disclosures by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “1934 Act”).1 The rules require registrants to provide certain climate-related information in their registration statements, annual reports, and audited financial statements, as applicable, including: (i) a registrant’s climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, its business strategy, results of operations, or financial condition; and (ii) certain disclosures related to severe weather events and other natural conditions (the “Climate Risk Disclosure Rules”). The Climate Risk Disclosure Rules include a number of changes from the proposed rules that are intended to mitigate the compliance burden on registrants and lessen disproportionate impacts on smaller and emerging growth firms.2
A Brief Look at the Climate Risk Disclosure Rules
In the Adopting Release, the SEC notes that the Climate Risk Disclosure Rules are being adopted to (i) “respond to investors’ concerns regarding the adequacy of current disclosure practices” by “improving the consistency, comparability, and reliability of climate-related information for investors” and (ii) “elicit enhanced and more consistent and comparable disclosure about the material risks that companies face and how companies manage those risks.”3 Further, the Climate Risk Disclosure Rules are “designed to work within the existing framework of U.S. securities laws that call for disclosure about the material risks that companies face” and “provid[ing] investors with more complete information about a company, the risks it faces, and its business, finances, and results of operations while affording investors the protections of the securities laws for this information.”4 This existing framework includes 2010 climate disclosure guidance5 and existing statutory and regulatory rules concerning forward-looking disclosure rules.6
Specifically, the Climate Risk Disclosure Rules require:
>a description of any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on the registrant’s strategy, results of operations, and financial condition, as well as the actual or potential material impacts of those same risks on its strategy, business model, and outlook;
>specified disclosures, regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk or use of transition plans, scenario analysis or internal carbon prices to manage a material climate-related risk;
>disclosure about any oversight by the registrant’s board of directors of climate-related risks and any role by management in assessing and managing material climate-related risks;
>a description of any processes the registrant uses to assess or manage material climate-related risks;
>disclosure about any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
>disclosure of emissions data on a phased in basis by certain larger registrants when those emissions are material, and the filing of an attestation report covering the required disclosure of such registrant’s emissions data, also on a phased in basis; and
> disclosure of the financial statement effects of severe weather events and other natural conditions including costs and losses.7
To implement the Climate Risk Disclosure Rules, the SEC amended Regulation S-K, adding a new section (subpart 1500) composed of the climate-related disclosure rules, and Regulation S-X, adding a new article (Article 14) to govern the financial statement disclosures. The Climate Risk Disclosure Rules will be phased in for all registrants, with compliance dates that range from 2025 through 2033 depending on the status of the registrant and the content of the disclosure.8
Unique Characteristics of the Municipal Securities Market
Municipal issuers are not subject to line-item disclosure requirements that regulate their corporate, registered counterparts. As such, the Climate Risk Disclosure Rules do not directly apply to municipal issuers. However, municipal issuers are subject to the antifraud provisions of the federal securities laws, which: (i) require disclosure of material information about securities to allow investors to make informed decisions; and (ii) prohibit misrepresentation or other fraudulent conduct in connection with the purchase and sale of securities. Such objectives are accomplished largely through Section 17(a) of the Securities Act of 1933 (the “1933 Act”) and Section 10(b) of the 1934 Act (and Rule 10b-5 promulgated thereunder). When municipal issuers make disclosures to investors, they must ensure that the disclosures do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The disclosure must be examined in light of these requirements each time a municipal issuer speaks to the market.
Municipal issuers must analyze both whether it would be appropriate for them to make climate-related risk disclosures and the content of such disclosures through this materiality lens. The concept of materiality, as currently defined and understood in the municipal securities market, encompasses those specific instances where climate-related issues are material to investment decisions with respect to the particular debt issues addressed by the disclosure.
Climate Change Disclosure in the Municipal Securities Market
Using materiality concepts as the guidepost, and in the absence of any rule-based mandate, municipal market offering documents have increasingly included statements addressing climate risk disclosure in recent years. Issuers may choose to disclose the costs of remediation of past climate-related damage, the projected costs of future adaption to climate change, projected direct impacts of climate change upon the issuer’s capital and operating costs or revenues, or projected changes in the issuer’s business model as a result of climate change. For such disclosure to be required under the antifraud rules, the content of the disclosure must be deemed material to a reasonable investor. Many issuers in the municipal securities market have taken a proactive approach in addressing climate change and environmental issues. The market has seen disclosure addressing issuer-specific risk factors, as well as capital projects and planning efforts with a primary purpose of increasing resilience in response to a broad array of climate-related issues, including rising temperatures, air quality issues, increased precipitation events, rising sea levels, storm surges, and widening flood zones.
While the financial effects of climate change are difficult to quantify, many issuers have developed (and disclosed) projected cost estimates related to a variety of future fiscal impacts of certain foreseeable climate changes, including the risks of expensive climate events and of more pervasive changes, as well as capital and other cost and revenue impacts associated with such risks. Where applicable, many issuers have also included statements that describe climate change readiness and sustainability plans that address initiatives to prepare for future climate-related challenges.
How Could the SEC’s Climate Risk Disclosure Rules Change Municipal Securities Market Practices?
While the Climate Risk Disclosure Rules do not directly apply to the municipal securities market currently, it is clear that this type of disclosure is a focal point of regulators and market participants. It is possible that the Climate Risk Disclosure Rules are the first step in further regulation in this area and that future rulemaking could apply more directly to municipal securities. There are several ways in which this could occur, including: (i) SEC guidance in the form of staff interpretive release analyzing the adequacy of climate risk disclosure in the marketplace; (ii) SEC enforcement actions that focus on a particular issuer’s offering documents and the quality of the climate risk disclosure therein; (iii) standardizing requests from rating agencies on an issuer’s climate-related risks and mitigation/remediation plans, as well as refinements to ratings criteria requiring a climate-related risk analysis; and (iv) amendments to municipal securities disclosure rules, such as Rule 15c2-12,9 or rules promulgated by the Municipal Securities Rulemaking Board, both of which would apply directly to regulated parties (such as underwriters/broker-dealers) and then indirectly to issuers to ensure compliance with such rules.
The differences between the initially proposed and final forms of the Climate Risk Disclosure Rules and extensive discussion of comments in the Adopting Release are valuable sources of information with respect to the SEC’s current views as to a number of disclosure points, at least some of which seem likely to affect municipal market practice. It also seems likely that investor responses to the development of corporate disclosure standards in this area will increasingly affect municipal market practices. This may be especially the case with respect to the comparability of information available to investors from various sources.
Self-policing and adopting a proactive approach on climate risk disclosure, if widespread and effective to “respond to investors’ concerns regarding the adequacy of current disclosure practices,”10 should go a long way to stave off further regulation on these matters in the municipal securities market.
Next Steps
In light of the Climate Risk Disclosure Rules and similar initiatives, it would be prudent for municipal issuers to institute procedures for the regular review of the adequacy of their climate risk disclosure. With the focus on materiality, issuers should consider whether there are any internal climate risk policies or procedures, initiatives, or reports that may warrant discussion in an offering document. These items may be posted on an issuer’s website and/or described in budget proposals alongside other issuer priorities. Issuers and their financial staff and debt management teams should be sensitive to the publication of such items when drafting offering documents and determine whether any data, projections, or conclusions regarding the financial impact of climate change on the issuer and its infrastructure should be included therein. Over the course of the last several years, these disclosures have also become a focal point of underwriters and their counsel in the preparation of due diligence questionnaires. In providing answers to such questions, issuers will benefit from the participation of and input from officials responsible for implementing any sustainability plans and initiatives regarding future climate-related challenges.
The objective should be ensuring consistent and reliable disclosure by the issuer on climate-related risks across applicable platforms.
Firm Contact
For additional information on the Climate Risk Disclosure Rules and the matters discussed herein, please contact Brian Garzione, the firm’s securities law and disclosure partner, in our Washington, D.C. office at 202-682-1493 or bgarzione@hawkins.com.
- SEC Rel. Nos. 33-11275; 34-99678; The Enhancement and Standardization of Climate-Related Disclosures for Investors (Mar. 6, 2024); https://www.sec.gov/ rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors (the “Adopting Release”).
- The SEC released the proposed climate risk disclosure rules on March 21, 2022, which resulted in thousands of comment letters. The proposed climate risk disclosure rules were described in a Hawkins Advisory, dated July 27, 2022, which is available at https://www.hawkins.com/about/publications/2022-07-28-municipal-market-federal-securities-law-update-2022. The comment letters were wide-ranging and highlighted some of the more controversial aspects of the proposed rules.
- See Adopting Release at.12 and 14-15.
- Id. at 54.
- Id. at 13-14 and footnotes 13-17.
- Id. at 394-402 and footnotes 1673-1703.
- Id. at 15-16.
- See id. at 588-592 for a discussion of the phased compliance dates for the Climate Risk Disclosure Rules.
- The full text of Rule 15c2-12 can be found at 17 C.F.R. §§ 240.15c2-12; https://www.ecfr.gov/current/title-17/chapter-II/part-240/subpart-A/subject-group-ECFR541343e5c1fa459/section-240.15c2-12. See also the firm’s website for a variety of advisories on Rule 15c2-12 available at https://www.hawkins.com/ about/publications.
- See “– A Brief Look at the Climate Risk Disclosure Rules” above.
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