US SEC climate rule: Just the fuel companies need to boost reporting?

You’d be forgiven for thinking the recently adopted US SEC Climate-related Disclosure Rule is a modern retelling of the Goldilocks and The Three Bears fairytale. “It’s too strong” say some. “It’s too weak” say others. But what about that “just right” sweet spot?

It’s true that the SEC Climate Rule has sparked contentious debates. State Attorney Generals and the US Chamber of Commerce have filed petitions challenging the rule [1]. Republican SEC Commissioner Mark Uyeda has raised an issue [2] that the SEC “elevates climate above nearly all other issues facing companies”, while fellow Republican Commissioner Hester Peirce chooses the “Green Regs and Spam” [3] pun to argue that “the attempt to copy European climate disclosures will harm innovation”.

On the flip side, the Natural Resources Defense Council (NRDC) filed a petition [4] that the ruling does not go far enough, following the SEC’s decision to drop scope 3 reporting and soften scope 1 and 2 reporting requirements. Additionally, the Sierra Club, a nonprofit environmental organisation, sued the SEC [5] in the District of Columbia Circuit on the grounds that the Club and its members cannot adequately manage their investments in public companies without complete information on their exposure to climate risks. Both environmental groups have since dropped their legal challenges [6], deciding to focus their resources elsewhere to improve climate-related disclosures.

Whilst navigating this terrain is challenging, it’s important not to get lost in the arguments. Embracing the proposed rules will yield benefits for companies that are worth considering.

1. Take a pivotal step towards addressing the pressing issue of climate change. The rule shows the SEC is seeking to foster a new era of transparency and accountability, starting to bridge the gap between US companies and their European counterparts who have already been reporting on climate-related topics for several years. The new disclosures will empower your stakeholders, including investors, to make informed decisions, channel capital towards sustainable initiatives and away from environmentally detrimental practices. By mandating companies to disclose their climate-related risks, impacts, and strategies, this shift aligns with the global imperative to mitigate climate risks and transition towards a low-carbon economy. 

2. Bolster investor confidence and foster trust in financial markets. By providing standardised and comparable climate disclosures, companies can enable investors to accurately assess risks and opportunities across portfolios. This transparency enhances market efficiency, mitigates information imbalance, and reduces the likelihood of investment losses stemming from undisclosed climate risks. By aligning financial reporting with environmental performance, companies signal their commitment to responsible stewardship and sustainable value creation.

3. Improve relations with customers, employees, and communities. Consumers are prioritising sustainability in their purchasing decisions, favouring companies with transparent and ethical business practices, boosting brand loyalty and market reputation. Employees are increasingly drawn to organisations that prioritise sustainability, leading to higher employee engagement, retention, and productivity. By addressing climate risks and promoting sustainable practices, companies contribute to the well-being of local communities and ecosystems, fostering positive relationships.

4. The new SEC Climate Rule offers significant benefits by aligning with other incoming disclosure standards and regulations, such as the California Climate Bills. This harmonisation will simplify compliance for companies, allowing them to streamline reporting processes and reduce administrative burdens. With this benefit in mind, businesses can present consistent and comparable climate-related data, enhancing transparency for all stakeholders.

The arguments around whether the SEC “porridge” is too hot or too cold may go on, but what this underscores is the need for a balanced approach to regulatory oversight. One that acknowledges the diversity of market participants and fosters collaboration towards shared environmental goals. One that sets manageable expectations for companies as a starting point to push them towards better climate accountability and reporting.

Embracing the SEC Climate Rule represents a critical opportunity to catalyse positive change, enhance resilience, and align financial markets with environmental imperatives. The “porridge” may not yet be “just right” but it’s certainly the fuel needed to embark on widespread climate reporting in the US.

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References

[1] https://www.reuters.com/sustainability/climate-energy/republican-led-states-say-they-will-sue-us-securities-regulator-over-climate-2024-03-06/

[2] U.S. Securities and Exchange Commission, Speeches and Statements

[3 https://www.seyfarth.com/news-insights/final-sec-climate-disclosure-rules-greeted-with-mixed-emotions-and-lawsuits-what-your-company-needs-to-know.html

[4] United States Court of Appeals for the Second Circuit, Natural Resources Defense Council v. U.S. Securities and Exchange Commission Petition for Review of a final rule of the U.S. Securities and Exchange Commission

[5] United States Court of Appeals for the District of Columbia Circuit, Sierra Club and Sierra Club Foundation v. U.S. Securities and Exchange Commission and Gary Genslar, Chair, U.S. Securities and Exchange Commission

[6] Bloomberg Law, Green Groups Drop Suit Against SEC Emissions Disclosure Rules