Climate disclosure will go mainstream despite opposition to SEC rules

The future will see companies having a more comprehensive understanding of their carbon footprint and climate-related risks

Earlier this month, the US Securities and Exchange Commission unveiled the climate disclosure rule, a landmark regulation aiming to meld environmental accountability with corporate transparency. The rule’s introduction was immediately met with legal contention, including an administrative stay by the US Court of Appeals for the Fifth Circuit, sparking vigorous debate over the SEC’s jurisdiction and the delicate balance between regulatory mandate and constitutional liberties.

On Friday, it was announced that the litigation challenging the SEC’s climate regulations will be heard by the conservative-leaning Eighth Circuit, following a lottery by the judicial panel on multi-district litigation. This move, consolidating nine lawsuits from six circuits into one case, underscores a pronounced political and ideological rift over the SEC’s authority and the extent of its environmental regulatory reach.

Independent of political viewpoints or legal debates, these legal hurdles are likely to serve only to delay the rule’s implementation, affording companies additional time to align their strategies and operations with the evolving regulatory framework.

The climate disclosure rule is emblematic of the SEC’s dedication to enriching investor knowledge with intricate details on corporate environmental practices and impact. It acknowledges the profound interconnection between climate change and economic resilience, aspiring to equip investors with the tools necessary to navigate the evolving corporate landscape. Nevertheless, the rule has drawn sharp criticism and staunch support in equal measure, spotlighting the complicated legal and regulatory discussions surrounding corporate governance, risk management and the extensive implications of climate risks on corporate accountability.

Critics, led by conservative policymakers and business advocates, argue that under chair Gary Gensler, the SEC has exceeded its regulatory scope, pursuing a partisan agenda that strays into environmental regulation without clear legislative backing. Their concerns highlight potential overreach and issues of compliance with the Administrative Procedure Act, which demands thorough public engagement and a balanced assessment of the rule’s economic impacts versus its benefits.

They also point to First Amendment implications, indicating a broader debate on the SEC’s role in enforcing environmental disclosures. Fordham Law School professor Sean Griffith noted before the rules were published that they “are controversial because they harm investors as a class in order to confer a benefit upon a subgroup of investors … Unfortunately for the SEC, compelling disclosures that impose a political viewpoint is anathema to the First Amendment.”

Conversely, environmental advocates have criticized the rules for lacking rigor, particularly in addressing Scope 3 emissions.

Need for a balanced approach

Such criticism from supporters and critics of the rule signal significant challenges for the SEC’s future regulatory framework. As the rule faces judicial scrutiny, its path will set a precedent for how environmental and social governance factors are integrated into regulatory mandates, potentially affecting a wide range of future policies beyond climate disclosures.

This legal impasse also highlights the necessity for a balanced approach between ambitious regulatory reforms and the pragmatic realities of their application and, despite the opposition, accentuates a growing shift towards sustainability and the integration of environmental considerations in the fabric of corporate governance. Reminiscent of the New Deal’s impact on financial reporting, the rule marks a pivotal point in regulatory history, representing a shift in how corporate achievement is defined and measured, pioneering the integration of environmental accountability into corporate disclosures and setting the stage for the advancement of sustainability metrics and environmental accounting.

In a global context, the SEC’s initiative aligns with broader international efforts to incorporate environmental concerns into corporate governance, such as the EU’s Non-Financial Reporting Directive. This comparison emphasizes a growing international consensus on the importance of transparency in environmental impact, laying the groundwork for potential collaboration and harmonization of standards across jurisdictions.

As the SEC’s rule aligns with these international strides toward sustainability, it also invites a closer examination of the unique challenges and perspectives within the US context.

“While it is unusual for the SEC to be sued on both sides of a rule, that was always going to be the likely outcome here given the controversial nature of the issue,” says former SEC attorney Fitzann Reid. “The upcoming presidential election adds another layer of complexity, as a change in administration could potentially lead to efforts to dismantle or undermine the SEC’s final rule in its entirety.”

However, regardless of the outcome of the SEC’s rule, many companies will still have to comply with similar disclosure requirements in California and the EU, notes Reid.

Leaders will have the ‘last laugh’

Reflecting on the implications of the SEC’s climate disclosure rule, it becomes clear that the path ahead necessitates fostering a business ethos where transparency, accountability, and environmental stewardship are embedded in the core of corporate reporting. In the interim, companies and stakeholders must maintain vigilance regarding unfolding legal challenges and the potential impacts on the implementation and enforcement timelines of the rule.

Businesses are urged to pivot, ensuring strategies and operations are in sync with the rule’s shifting parameters by bolstering expertise in climate data analytics, scenario analyses and planning, and comprehensive risk management. Further, the rule’s provisions for safe harbor for certain climate-related disclosures offer companies an opportunity to gain a competitive edge by leading with transparency, and proactively assessing their environmental impact and sustainability efforts in accordance with the original intentions of the rule.

Regardless of the legal outcome, the trend toward greater sustainability and transparency in corporate reporting is unmistakable and will continue to shape investor expectations and corporate strategies. Stakeholders who prepare for a regulatory environment demanding more comprehensive disclosures on environmental impacts, sustainability practices, and governance frameworks will, ultimately, have the last laugh.

A version of this article was published by The Financial Times’ Sustainable Views. Click here to view.