The Aftermath of the SEC’s Climate Disclosure Rule

“To be sure many would like the rules to go further while some would argue the SEC has no authority in this area to write rules. Neither view is correct.”


Illustration by II

SEC commissioners voted on Wednesday to adopt new rules that will force public companies to make climate-related disclosures about how they operate. Immediate reactions to the rules were mixed.

The rules were one of the regulator’s most followed in recent history since they were proposed two years ago. The proposal drew 24,000 comments from companies, legislators, trade groups, asset managers, and investors, who shared their opinions about the effort to standardize information on the financial impact climate risks might have on public companies.

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure.’ Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements,” SEC Chair Gary Gensler said in a statement about the new rules.

At least one institutional investor publicly praised the rules this week. The California Public Employees’ Retirement System, which supported the new rules and twice shared its input, said they are a much needed boost to corporate transparency.

“Climate risk is investment risk. CalPERS has long been a proponent of enhanced disclosure, particularly in regards to Scope 1 and Scope 2 emissions, because it is crucial in making investments on behalf of our two million members. While any progress is a victory for investors, there is still more work to do. Transparency is vital to the success of CalPERS’ sustainable investment plan and the transition to a lower-carbon economy,” Marcie Frost, chief executive officer for CalPERS, said in a statement.

Some supporters were upset that the version of the rule passed 3-2 (three Democratic commissioners supported it and two Republicans opposed) and argued that it didn’t require enough from companies. A common complaint from that group is that Scope 3 emissions reporting — which includes disclosure of activities from assets not owned or controlled by an organization, such as suppliers — was left out of the final rule.


Those opposed to the new rules went as far to say the SEC should not require any climate-related disclosures whatsoever — even though regulating organizations domestically and abroad already have similar or more demanding requirements. The state of California, European Union, and the International Sustainability Standards Board all require Scope 3 reporting.

Ten Republican-led states, including West Virginia, Georgia and Alabama, have already filed a lawsuit challenging the legality of the SEC’s new rules.

Thomas Gorman, a partner at the law firm Dorsey & Whitney who previously was senior counsel in the SEC’s enforcement division, said the rules are “more than a good start” for the regulator.

“To be sure many would like the rules to go further while some would argue the SEC has no authority in this area to write rules. Neither view is correct. Viewed in the context of the first real ruling effort tied to the environment, they are significant even absent Scope 3 disclosures, particularly since they include 1 and 2. And, while the rules will be challenged, since they focus largely on what firms are now doing and spending on these issues it seems clear that the rules are tied tightly to the point critics make — the SEC is concerned with investment and the use of investor money,” Gorman said.

Some companies might have breathed a sigh of regulatory relief that the rules passed didn’t require as much disclosure as the proposed ones. But companies will still have to comply with more stringent requirements in other jurisdictions they operate in. And the climate-related disclosures that will be required by the SEC are still a significant change to reporting at public companies.

“Regardless of whether it marks a watershed moment or a watered-down rule, companies are now facing a wave of global requirements,” KPMG U.S. ESG Leader Rob Fisher said. “Amidst these disclosure requirements, the organizations that view new reporting requirements as an integral part of their broader strategy will find themselves in a better position to realize the full value sustainability initiatives can bring to their business.”