The US Securities and Exchange Commission (SEC) recently released a new rule resulting from a process intended to make companies disclose their climate-related financial risks to investors. But in trying to shape a regulation that would mollify opponents—largely industries responsible for the heat-trapping gases that cause climate change—the SEC failed to set a standard that would help investors understand how companies will fare in the clean energy transition.
The final rule that arrived in early March, almost two years after its introduction, reflects the tortured process that produced it. The document clocks in at 888 pages, twice the length of the already lengthy draft rule. A close reading reveals that nearly all the draft rule’s tenets were bracketed by legal caveats that greatly weakened it from what supporters had hoped. So, after years of asking for standardized information about a company’s exposure to climate-related risks, investors are left with a regulation of twice the length and half the weight.
Final rule leaves too much to the imagination
The final version of the rule, titled Enhancement and Standardization of Climate-Related Disclosures for Investors, is an improvement over the status quo in some respects, but the bar was low. The rule was created in response to investor complaints that companies weren’t adequately disclosing information about climate-related financial risk. The SEC released guidance in 2010 directing public companies to disclose risks resulting from climate-related regulation, legislation, and weather, among other sources. Few companies did so, however, posing great risk to investors and the economy: A 2015 Union of Concerned Scientists report on the threat to oil refineries from rising sea levels found that investors and taxpayers will likely bear the costs of future disasters if companies fail to disclose and manage these risks.
On the plus side, companies will now have to disclose climate-related information such as global warming emissions and energy transition plans in annual SEC filings that they now report in annual reports and other public-relations products that often currently don’t contain standardized or comparable data. The range of information required for disclosure by the new rule sounds impressive: greenhouse gas (GHG) emissions produced by company operations and purchased from suppliers (known as Scope 1 and Scope 2 emissions); the financial impact of severe weather events; climate-related transition plans or risk analyses, which will hopefully discourage greenwashing; and the role of Renewable Energy Credits and carbon offsets in corporate transition plans.
Unfortunately, however, the requirements left out or weakened in the final rule were so integral to its effectiveness that some analysts—such as former SEC commissioner Allison Herren Lee—believe the rule is useless without them. The biggest of these is Scope 3 emissions, produced further down a company’s value chain and accounting for up to 90 percent of total emissions for high-emitting industries like oil and gas.
The SEC’s draft rule had directed companies to disclose Scope 3 emissions and document climate-related risk in the financial portion of SEC filings. Those steps had long been requested by investors. Yet both provisions were dropped from the final rule.
Special interests strong-arm the SEC
Why did that happen? In a word, lobbying. High-emitting industries and the trade organizations that represent them launched an all-out assault on the rule that drew heavily from old anti-regulatory and climate-denial playbooks, aided by newer crusades against sustainable investing. Oil and gas companies in particular groused about disclosing Scope 3 emissions and information about how climate-related risk would impact their strategies for the future. Groups like the Republican Attorney Generals’ Association threatened to challenge the SEC’s authority in court, even though the rule clearly falls within the SEC’s mandate to protect investors.
In response to these threats, the SEC attempted to create a Teflon-coated rule designed to slip past even the most anti-regulatory judge. The legal concept providing that grease is “materiality,” a word that occurs in the final rule more than 1,000 times—four times as often as it does in the draft rule. Materiality is a solid concept but tricky to define, somewhat like Judge Potter Stewart’s “I know it when I see it” definition of obscenity. The International Financial Reporting Standards Foundation—a nonprofit that sets global financial reporting standards—says information is material if “omitting, obscuring or misstating it could be reasonably expected to influence investor decisions.” The SEC says, in its 1999 guidance on materiality, that “a matter is material if there is a substantial likelihood that a reasonable person would consider it important” (italics mine).
Since the SEC’s job is to protect investors, you might think investors would decide what kinds of information is material. But the final rule ignores the fact that 97 percent of investors supported Scope 3 disclosures in their comments on the rule. Closer attention was apparently paid to voices such as Chevron’s board of directors, which said in its 2023 proxy statement that “reducing Chevron’s absolute Scope 3 greenhouse gas (“GHG”) emissions is not in stockholders’ interests, nor should it be Chevron’s responsibility.” In the end, decisions about whether climate-related risk is material will be largely left to corporate lawyers, who themselves are another major beneficiary of the rule.
Well-funded foes find sympathetic courts
All the materiality qualifiers failed to inoculate the rule from litigation: Within hours of its release, several Republican attorneys general had filed suit accusing the SEC of overstepping its mandate. Meanwhile, environmental groups Earthjustice, Natural Resources Defense Council, and the Sierra Club filed lawsuits stating the watered-down rule fails to fulfill the SEC’s mandate of protecting investors. As of this writing, nine lawsuits have been filed in six federal appellate courts opposing the rule.
Plaintiffs in one of the lawsuits—fracking companies Liberty Energy Inc. and Nomad Proppant Services LLC—successfully persuaded a judge in the notoriously conservative U.S. Court of Appeals for the Fifth Circuit to temporarily halt the rule on March 15, but the stay was lifted a week later when the cases were merged and transferred to the Eighth Circuit court in Missouri. The Eighth Circuit—also stacked with predominantly Republican appointees—was chosen by lottery after the SEC accused opponents of “forum shopping,” or filing with courts where judges are known to have anti-regulatory sympathies.
Many of the rule’s opponents are linked by a campaign to stop the global economy’s transition to clean energy. This effort is fueled by tens of millions in so-called “dark” money funneled through industry trade associations and front groups; well-established organizations such as the US Chamber of Commerce and American Petroleum Institute have also long worked to obstruct shareholder rights and attempts to regulate climate-related financial risk. These same actors are behind the misguided effort to demonize any evaluation of investments by environmental, social, or governance (ESG) factors as “woke” and bad for shareholders. Their tactics are on display in a lawsuit ExxonMobil brought against two investors who called on the company to reduce its Scope 3 emissions, as well as in subpoenas of some of the same groups filed by Republicans in Congress.
But investors are pushing back. Several major Chamber members, including Microsoft, Meta and Pfizer, have expressed their opposition to the organization’s climate obstruction. And CALPERS—the California employee pension fund, one of the country’s largest—has warned ExxonMobil that it will consider divestment if the company doesn’t drop its lawsuit against shareholders. “We don’t think it’s particularly helpful for companies to be suing the people who provide their capital,” CalPERS Investment Director Drew Hambly told the board at a March meeting.
Delaying disclosure harms investors
Anti-ESG antics might make some political donors happy, but most of the guidance coming out of the financial industry tells companies that the future is here and it’s time to buckle up. Climate disclosure regulations are taking shape in markets around the world, such as the European Union, China, and Singapore. US states such as New York and Illinois are also preparing to launch disclosure requirements similar to those passed last year in California. The steady advance of these regulations is driven by shocking data about the immense costs investors will face if business and government don’t unite in bringing emissions down. Most vulnerable to climate-related financial risk are long-term investments most often associated with institutions like pensions, retirement funds and endowments, bringing the crisis home to many—if not most—people in the United States.
The final SEC rule is a long way from giving these investors the protection they deserve. Allowing reactionary politicians and judges to strip away what little protection the rule affords is unconscionable. The rule can be strengthened by additional enforcement and guidance in the years ahead—guidance that might even answer concerns of those critical of the rule, if they would engage with it. Despite what some might think, throwing up roadblocks against transparency doesn’t buy time for those critics. It wastes time we don’t have.