Regulation in Focus: What the New SEC Rule Means for Investors
The SEC's new climate rule: Progress, but not enough.
Investors are increasingly focused on climate-related risks and opportunities as factors in decision-making. The SEC's recent climate risk disclosure rule aims to address this demand. After delays and facing likely legal challenges, the rule is now a reality, albeit in a less stringent form than initially proposed.
The new rule will improve data in climate-related disclosures by public companies subject to the rule. Improving the consistency of metrics will benefit investors looking to understand climate and transition impacts across firms.
A Step Forward or a Missed Opportunity?
The new rule aims to support standardization in disclosures related to climate risks and emissions, enabling financial actors and markets to more efficiently allocate capital and manage risks. By introducing expectations for more quantitative reporting, the SEC is advancing transparency on climate-related risks.
However, the rule’s final form is significantly weaker than its draft version and more limited than rules agreed by other international financial regulators (as well as local regulators). In particular, the lack of requirements around Scope 3 emissions and scenario analysis have raised the biggest concerns.
The rule also will face a series of ferocious legal challenges in the U.S.’s current anti-ESG climate. Even ahead of these challenges, it remains a question of whether the rule can sufficiently empower investors to evaluate and act on climate-related risks and opportunities.
The Debate Over Scope 3 Disclosure
Particularly contentious was the decision to exclude a mandate for Scope 3 emissions disclosures. Scope 3 emissions are emissions from outside of a firm’s operations, such as those throughout their value chain.
For sectors like finance and fossil fuel production, Scope 3 emissions constitute the majority of their carbon footprint. Excluding these indirect emissions from reporting requirements provides an incomplete picture of a company's climate impact and diminishes investors' ability to assess and engage with firms on climate-related issues.
Risks of Regulatory Fragmentation
Institutions with international exposure or progressive state regulators, such as those in California, will find the SEC's rule to set a lower bar than their current requirements. These differences present the risk of regulatory fragmentation, as U.S. firms grapple with reconciling the SEC's standards with more expansive international and state-level regulations.
The current rule's narrower scope compared to other climate-related reporting requirements could augment the regulatory burden for filers, complicating efforts to benchmark and compare firms.
Despite these limitations, the introduction of the SEC's climate rule is a positive development. It narrows the regulatory gap between U.S. firms and their international counterparts, which should support better climate risk management and greater corporate accountability for climate action.
Looking Ahead
The new SEC climate rule, while weaker than anticipated, marks progress in the push for transparency and accountability in how firms report their climate risks. It is a foundational step that acknowledges the critical role of financial markets in addressing climate change.
However, the journey towards a coherent regulatory framework capturing climate-related risks and opportunities remains far from complete. Even as the rule faces legal scrutiny and the industry considers its requirements, the planet continues to warm.
It is a powerful reminder of the necessity, but also the insufficiency, of climate-related financial disclosures to promote decarbonization and climate resilience.