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Navigating The New Climate Disclosure Landscape: The Crucial Role Of D&O Insurance

The Securities and Exchange Commission (SEC) has recently ushered in a pivotal shift in climate disclosure regulations for public companies, signifying a critical juncture that demands rigorous adherence. This move underscores the heightened liability landscape for corporate disclosures, amplifying the importance of Directors and Officers (D&O) insurance as a protective bulwark.

In light of this evolving regulatory terrain, the significance of D&O insurance escalates, serving as a vital shield against the potential financial fallout stemming from disclosure infractions and bolstering organizational resilience.

Andrea Lieberman, the US financial services claims leader at Lockton, underscores the urgency for companies to embark on preparatory measures without delay. While these regulations are presently on hold by the SEC amidst ongoing legal contests and might not come into effect until the following year, their impact on public companies looms large once enforced.

A Paradigm Shift in Climate Regulations The SEC’s recent finalization of climate disclosure rules for public companies, originally proposed in 2022, marks a significant milestone. According to SEC Chair Gary Gensler, these regulations aim to furnish investors with uniform, comparable, and actionable information, while imposing clear reporting obligations on issuers.

“Under the new directives, public companies must divulge a comprehensive array of information, encompassing material climate-related risks and their potential ramifications on their business, operations, and financial status,” elucidates Lieberman. Additionally, companies are mandated to disclose any climate-related objectives or benchmarks that could reasonably impact their business trajectory, alongside delineating internal mechanisms for identifying, assessing, and mitigating material climate-related risks, inclusive of management and board oversight roles.

While the SEC’s initial 2022 proposal encompassed reporting Scope 3 emissions from indirect activities, such as those stemming from suppliers, this stipulation was omitted from the final rules due to substantial opposition grounded on measurement and reporting complexities.

The rollout of these regulations aligns with a global trend observed in regions like the UK, where publicly traded companies have been obligated to make climate-related disclosures since early 2021.

Navigating Legal Hurdles Amid New Disclosures

Despite the aspiration to standardize climate-related disclosures, the new rules have triggered legal contests, prompting lawsuits from trade groups and attorneys general across various states.

“Litigants and other dissenting voices argue that the SEC exceeded its statutory rulemaking authority in implementing these rules, failed to adequately integrate or analyze the extensive public feedback received post the initial proposal, and neglected to conduct a thorough cost-benefit analysis,” notes Lieberman.

As litigation against the regulations consolidates in the 8th U.S Circuit Court of Appeals, and with the SEC deferring their enforcement pending the court’s verdict, public companies are advised against postponing their compliance efforts.

Moreover, these regulations heighten the susceptibility to securities and derivative claims, as stakeholders scrutinize the adequacy and materiality of climate disclosures. The SEC retains the authority to enforce securities law disclosure breaches, further underscoring the imperative for compliance.

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