SEC Climate-Related Disclosure Rules: Key Considerations for PE Sponsors

May 2024

On March 6, 2024, the U.S. Securities and Exchange Commission adopted long-awaited rules requiring registrants, including foreign private issuers, to disclose extensive climate-related information in their registration statements and periodic reports. Almost immediately, the Rule met with legal challenges in six federal circuits, which were consolidated into a single case before the U.S. Court of Appeals for the Eight Circuit on March 21. On April 4, the SEC exercised its discretion to stay the Rule pending completion of judicial review in the Eighth Circuit, but stated that it would continue “vigorously defending” the Rule in court.

Despite the legal challenges to the Rule, it raises a number of issues that SEC registrants and sponsors should consider when undertaking M&A and securities transactions. We outline key considerations below.

1. The Rule does not apply to private companies

The Rule does not apply to private companies that are parties to business combination transactions involving a securities offering registered on Form S-4 or F-4, and certain transactions for which a proxy statement on Schedule 14A or information statement on Schedule 14C is required to be filed. This means that if the target being acquired is not an SEC registrant, climate-related disclosures with respect to the target are not required to be included in these forms.

Similarly, registrants that complete the acquisition of a private company and must disclose the financial statements of that acquired business under Item 9.01 of Form 8-K are not required to include the Regulation S-X footnote disclosure mandated by the Rule in the acquired company financial statements. In addition, any pro forma financial statements that are disclosed pursuant to Item 9.01 do not need to include the climate-related Regulation S-X disclosure to the extent that they relate to the acquired private company. As discussed below, however, (1) a private company engaging in an initial public offering on a Form S-1 or Form F-1 must comply with the Rule, without any exemption or additional phase-in, and (2) an acquiring public company must comply with the Rule after completing an acquisition of a private company.

2. The Rule’s reporting requirements apply to covered companies acquired at any time during a fiscal year

Under the Rule and absent any future guidance from the SEC, registrants that acquire a business or asset at any time during a fiscal year—including acquisitions made in the final quarter of the fiscal year, must include those businesses or assets in their climate-related disclosures for that year. This means that, depending on when in the fiscal year the acquisition takes place, registrants must be prepared to move quickly to collect from a target company the information required to make the necessary climate-related disclosures, and must have the controls and procedures in place to assess the quality of such information.

3. Remedies exist in cases where information is unknown and not reasonably available

In the adopting release, the SEC notes that, to the extent Scope 1 and/or Scope 2 GHG emissions disclosure is required by the Rule, registrants may avail themselves of Rule 409 of the 1933 Act and Rule 12b-21 of the 1934 Act. These rules allow a registrant to omit from their registration statements and periodic reports information that is unknown or not reasonably available, provided that (a) the registrant includes a statement to that effect, or otherwise indicates the absence of any affiliation with the person who possesses the information, and details any efforts to obtain the information from such person and (b) the registrant discloses the information that it does have or can reasonably obtain. Registrants that acquire private companies for which Scope 1 and Scope 2 greenhouse gas emissions data are not available may consider using these rules until the registrant is able to produce the necessary information. We note that use of these rules is not limited to GHG emissions and registrants may be able to invoke these rules for other disclosures required by the Rule.

As discussed below, parties also need to consider whether such disclosures should be made if an offering is planned or possible and all material information must be disclosed.

4. If a securities offering is planned or possible, registrants must consider the need to make Scope 1 and Scope 2 GHG disclosures

The Rule provides that GHG emissions disclosure required to be included in an annual report on Form 10-K may be incorporated by reference from the registrant’s quarterly report on Form 10-Q for the second fiscal quarter of the fiscal year in which such annual report is due, or may be included in an amended Form 10-K no later than the due date for such Form 10-Q.

A registrant that avails itself of this accommodation should consider the need to make such disclosures prior to a securities offering to ensure that all material non-public information (MNPI) has been disclosed at the time of the offering. This is particularly important in the first year that a registrant is required to make GHG disclosures, if such disclosures are new to the market. In subsequent years, registrants and underwriters may manage the risks associated with potential MNPI through due diligence discussions about the registrant’s expected GHG emissions reporting to ensure that the disclosure is unlikely to change materially from the prior year. Nevertheless, there remains some risk that GHG emissions will vary from expectations or prior year reporting, which may be addressed through additional (e.g., risk factors) disclosure in the offering document.

5. Prior to the phasing in of attestation requirements, underwriters are likely to request management comfort on Scope 1 and Scope 2 GHG emission disclosures

The Rule phases in an attestation requirement for Scope 1 and Scope 2 GHG emissions for registrants required to provide such disclosure (i.e., large accelerated filers and accelerated filers that are not smaller reporting companies (SRCs) or emerging growth companies (EGCs)). This attestation requirement will provide underwriters with comfort on the Scope 1 and Scope 2 GHG emissions disclosures.

However, before the attestations are required, underwriters may seek comfort in other ways if a voluntary attestation is not obtained by the issuer. For example, underwriters could require the Chief Financial Officer or Chief Sustainability Officer (or other appropriate executive officer) to provide a certification as to the accuracy of the information. Registrants need to be prepared to provide support for their GHG emissions disclosure for which they have not obtained attestation.

A similar issue arises in the context of issuers that are not subject to Scope 1 and Scope 2 GHG emissions disclosure requirements but who nevertheless voluntarily include such disclosure in their filings.

6. In Rule 144A and other unregistered securities offerings, market participants could request inclusion of climate-related disclosures

In Rule 144A offerings, the market generally looks to SEC disclosure requirements to inform the necessary disclosure in an offering document, with flexibility to omit SEC disclosure requirements that are not considered material. As a result, market participants may argue that the Regulation S-K (and for that matter, Regulation S-X) climate-related disclosures are presumptively material, even if the issuer is not otherwise required to make such disclosures in the offering document. Accordingly, issuers should be prepared to discuss the materiality of climate-related disclosures for their business in the context of an unregistered securities offering.

7. Companies conducting initial public offerings will be subject to the Rule’s requirements

The Rule does not provide an exemption or transitional relief for registrants engaged in an IPO. A company that is subject to the Rule is required to provide disclosure for the registrant’s most recently completed fiscal year for which audited financial statements are included in the filing. To the extent applicable, Regulation S-X footnote disclosure is required to be included in a company’s audited financial statements in their IPO registration statement and, therefore, will be considered “expertized” for securities law liability purposes.

That said, registrants that are smaller reporting companies (SRCs) or emerging growth companies (EGCs) have the benefit of extended phase-ins, as a result of which compliance must begin with respect to fiscal years beginning in 2027. Also, SRCs and EGCs are exempt from GHG emissions disclosure requirements altogether, as long as they maintain their status.

8. The Rule is likely to heighten the sensitivity of sponsors to climate-related risks in their M&A transactions

Sponsors are increasingly conducting due diligence on the climate-related risks of a target when such risks are relevant to the target or the industry in which it operates. The Rule is likely to heighten the sensitivity of sponsors to climate-related risks of targets and to their Scope 1 and Scope 2 GHG emissions more generally, particularly in respect of targets that are or may become subject to the Rule.

Climate-specific representations and warranties are not yet a staple of acquisition agreements, and, in the short term, the Rule is not expected to change the status quo. However, the increased awareness of climate-related risks and disclosure obligations under the Rule could lead sponsors to include climate-specific provisions in their transaction documents.

9. Registrants will need to consider the disclosures that they make outside of SEC filings

To the extent a registrant makes climate-related disclosures outside of its SEC filings, including in publicly available corporate responsibility or sustainability reports, or pursuant to U.S. Environmental Protection Agency regulations, California’s climate disclosure rules or the EU’s Corporate Sustainability Reporting Directive, registrants should consider whether such disclosures must also be included in SEC filings.

For example, although the Rule does not require registrants to disclose Scope 3 GHG emissions, if a registrant adopts a target that relates to Scope 3 GHG emissions, qualitative Scope 3 GHG emissions disclosure may be required to describe the registrant’s progress towards the target or that achieving the target involves material costs for the registrant. The staff of the SEC has stated that the Rule does not require quantitative disclosure of Scope 3 GHG emissions in any instance.

Private Equity Report Spring 2024, Vol 24, No 1