SEC Climate Disclosure Proposal Looms as Litigation Risk

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Apart from compliance costs, a proposed SEC rule on climate could give public companies a steep litigation bill

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The underlying premise is simple: Make a company talk more—on the record, in their mandatory disclosures like annual reports—and you are more likely to catch it in a mistake that could prove lucrative for the aggressive plaintiffs’ lawyers that earn a living suing companies after bad news.

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“The plaintiffs lawyers are waiting in the wings,” said Craig Marcus, a partner at law firm Ropes & Gray LLP who advises prominent public companies. “Get some disclosures, settlement and collect a fee? Yeah, absolutely.”

The SEC on Monday released its more than 500-page proposal for a set of climate disclosure requirements that would, if adopted, be among the most expansive and complex disclosure requirements the agency has yet put forward.

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The rule is meant to bring order to what has been uneven climate reporting by different public companies. In place of voluntary sustainability reports which use handpicked metrics, companies would have to disclose in much greater detail how much carbon they emit and how they plan to address looming climate risks. In theory, investors could then make more informed comparisons of businesses.

Observers already have noted that the new regime would require companies to spend considerable resources to craft these disclosures. SEC Commissioner Hester Peirce, a Republican who has been a critic of proposals to expand the SEC’s purview, said on Monday that the rule could create a “climate industrial complex” of newly enriched consultants.

That cost would be evident quickly, but private securities litigation tied to new climate disclosures represents a lurking threat that could materialize down the road.

Plaintiffs’ lawyers in typical cases pair with investors to sue a company over stock drops linked to issues a company didn’t adequately flag. A company might be sued, for example, if it says it has a substantial antibribery program but ends up caught in a corruption scandal.

The wide-ranging climate disclosures the SEC wants would up the number of avenues for a lawsuit. A wildfire in California destroys a facility, for example, and investors could claim they were misled about the company’s climate risk management. Or arguably investors could sue if the company miscalculated greenhouse-gas emissions.

For some companies, the SEC’s proposed rule would mandate that they determine and disclose emissions caused by supply networks and their customers in connection with their products, tricky endeavors that require assembling data many companies haven’t previously considered.

“What you disclose exactly and how you measure it is developing in real time,” said Amanda Halter, managing partner of the Houston office at the law firm Pillsbury Winthrop Shaw Pittman LLP. “We’re kind of building the plane as we’re flying it.”

The requirements could end up fueling a “dispute machine,” Ms. Halter said. Companies outside of the sectors traditionally heavily regulated under environmental rules will have to begin thinking proactively about their broad environmental impacts, she added.

The proposed rule wouldn’t impact companies immediately. It has a long lead time, with some companies not required to comply until 2026, and it is almost certain to face a legal campaign to squash it. Commissioner Peirce argued on Monday that the rule is outside the SEC’s authority to propose, and many lawyers agree that even if the SEC prevailed in any legal challenge to the rule, it will certainly face a tough fight.

Some plaintiffs’ lawyers are cautiously optimistic.

“What the SEC is doing is encouraging much more accurate and complete disclosures, and you may see litigation if there are material omissions or misstatements made to investors with regard to those climate disclosures,” said Darren Robbins, whose law firm Robbins Geller Rudman & Dowd The LLP brought securities actions that last year resulted in about $1.9 billion in settlements.

Mr. Robbins, though, added that “it’s still early.”

“We’ll see what the final rule says and how companies comply with it,” he said.

Write to Richard Vanderford at [email protected]

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Credit: www.Businesshala.com /

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