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SEC Supports Climate Disclosure Rules: What It Means for Businesses and Investors

September 11, 2024
●By CSE

In a significant move to enhance corporate transparency, the U.S. Securities and Exchange Commission (SEC) has taken a bold step by supporting its Climate Risk Disclosure Rules. This legal brief emphasizes the need for companies to disclose climate-related risks, marking a pivotal moment in the ongoing integration of environmental factors into financial reporting and investor decision-making. In this blog, we’ll explore what this means for businesses, investors, and the future of corporate governance.

 

Understanding the SEC’s Climate Risk Disclosure Rules

On March 6, 2024, the SEC adopted its Climate Risk Disclosure Rules, requiring publicly traded companies to report detailed information on their greenhouse gas emissions (Scope 1 and Scope 2).

These rules also address potential financial risks associated with climate change. Starting in 2025, companies must comply with these disclosure requirements, providing investors with data that helps assess corporate resilience in a rapidly decarbonizing economy. This transparency is aimed at empowering investors to make informed decisions in a climate-conscious marketplace. Learn here how CSE can help you with SEC (ESG reporting and carbon metrics).

 

Legal Challenges and the SEC’s Defense of Climate Disclosure Rules

The SEC’s climate disclosure mandate has sparked significant controversy, facing legal opposition from business groups, conservative states, and advocacy organizations. Critics argue that environmental disclosures fall outside the SEC’s scope, suggesting that the Environmental Protection Agency (EPA) or corporate boards should oversee these matters. Despite this pushback, the SEC stands firm, defending the rules on three key grounds:

Statutory Authority: The SEC asserts that its authority under the Securities Act of 1933 and the Securities Exchange Act of 1934 grants it the power to enforce these climate rules. According to the SEC, climate risks are financial risks, making disclosure essential for investor protection.

Reasonableness and Procedural Compliance: The SEC highlights the extensive notice-and-comment process it followed to develop these rules. The process aimed to balance investor needs with the regulatory burden on businesses. Materiality qualifiers were also included to minimize complexity and compliance costs for companies.

First Amendment Consistency: Addressing free speech concerns, the SEC defends the required disclosures as factual and non-controversial. The agency points to established legal precedents supporting commercial disclosures, emphasizing that the rules comply with First Amendment protections.

 

SEC’s Ongoing Legal Battle and Defense Strategy

On August 6, 2024, the SEC submitted a legal brief to the Eighth Circuit Court of Appeals, defending its Climate Rules from challenges by business groups and conservative states. These rules, adopted in March 2024 by a 3-2 vote, require publicly traded companies to disclose Scope-1 and Scope-2 greenhouse gas emissions and climate-related risks. Implementation is slated for 2025, with a phased approach based on company size. However, the SEC has delayed the rollout while litigation is ongoing.

The legal challenge focuses on three key issues: the SEC’s statutory authority, whether it reasonably assessed the economic impact of the rules, and whether the rules comply with the First Amendment. The SEC contends that recent Supreme Court rulings, including Loper v. Raimondo and the “major questions” doctrine from West Virginia v. EPA, should not apply in this case.

The SEC argues that climate-related risks, such as natural disasters and market transitions, have a direct impact on businesses. Therefore, clear and consistent climate disclosures are vital for investors. While the rules are not aimed at regulating climate change, the SEC maintains they are necessary for investor protection through increased transparency.

By providing reliable and comparable information on climate risks, the SEC believes these rules will help investors make informed decisions and protect their financial interests.

 

Implications for Corporate Governance and Investors

The result of the SEC’s legal defense will profoundly impact corporate governance in the U.S. If the Climate Risk Disclosure Rules are upheld, businesses will be required to prioritize sustainability and transparency in their operations.

On the other hand, if these rules are overturned, it could hinder the momentum for standardized climate disclosures, leaving investors without reliable data to gauge how companies are managing climate-related risks. For investors, these disclosures are critical to assessing long-term viability and resilience in a world increasingly shaped by environmental changes.

 

Global Context and Future Directions

Internationally, climate disclosure regulations are gaining traction. For example, the European Union has already implemented the Corporate Sustainability Due Diligence Directive (CSDDD), which sets robust standards for climate-related disclosures. This global alignment reflects a growing consensus on the importance of integrating environmental, social, and governance (ESG) factors into financial reporting. The SEC’s rules, if upheld, could bring the U.S. closer to this global standard.

 

What’s at Stake for Businesses and Investors

The SEC’s support for Climate Risk Disclosure Rules highlights the link between environmental sustainability and financial transparency. Both businesses and investors must recognize the value of comprehensive climate disclosures. Companies that adopt sustainability reporting early will enhance their long-term success. They will also build trust with investors who prioritize climate-related risks.

By following the SEC’s rules, businesses can increase resilience and attract climate-conscious investors.

Regardless of legal outcomes, the demand for climate transparency is growing. Companies should align their strategies with sustainability goals to meet investor and regulatory expectations. This proactive approach boosts resilience and builds investor confidence in a market shaped by climate risks and opportunities.

Embracing sustainability reporting gives businesses a competitive edge, better risk management, and stronger relationships with environmentally conscious stakeholders.

If you want to meet future challenges and drive your organization’s sustainability (ESG) performance, register for the C-suite Sustainability (ESG) Leadership Training Program, Sept. 26-27 & Oct. 1st.

 

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