Why We Still Need the SEC’s Climate-Related Disclosures Rule

Companies face growing financial risks from climate change. Around the world, investors are demanding more consistent, comparable, and reliable information about these risks so that they can make informed investment decisions. Regulators are listening. In March 2022, the Securities and Exchange Commission (SEC) proposed a rule that would require public companies to include in certain SEC filings specific climate-related disclosures. The SEC might finalize these requirements any day now. In the meantime, California and the European Union (EU) have adopted their own climate-related disclosure regimes. These new regimes require many of the same disclosures and cover many of the same companies as the SEC’s proposed rule.

So why is the SEC’s climate-related disclosures rule still necessary? For one thing, neither the California nor the EU regime applies to all public companies in the United States, so the SEC’s rule would still improve the consistency and comparability of climate-related disclosures for investors. For another, the SEC rule would likely enhance these disclosures’ reliability. Incomplete or inaccurate disclosures in SEC filings carry a broader range of potential liability under federal securities law than similar statements in other settings do, so the SEC rule incentivizes public companies to pay closer attention to their disclosures. At the same time, having already gathered much of the relevant information to comply with the California and EU regimes, many public companies would now find it cheaper to comply with the SEC’s rule than the SEC originally anticipated.

Regulators Around the World Are Adopting Climate-Related Disclosure Requirements

Public companies’ current climate-related disclosures do not adequately protect investors. Despite increasing investor demand for more climate-related information, disclosures vary in type, completeness, and formality. These inconsistencies make it difficult for investors to find climate-related information and to compare public companies based on this information when making investment decisions.

The proposed rule addresses this problem by specifying the climate-related disclosures that public companies must make in their registration statements and annual reports. The SEC based these requirements on the leading disclosure framework worldwide, the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The proposed rule clarifies that public companies must disclose short-, medium-, and long-term material risks. (Information is material if a reasonable investor would consider it important in making investment decisions.) But the proposed rule also requires disclosure of other climate-related information regardless of materiality, including information about public companies’ governance and management of climate-related risks, the impact of climate-related events and transition activities on their financial statements, and certain of their greenhouse gas emissions.

Like the proposed rule, the new California laws (SB 253 and SB 261) and the EU framework (namely the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards) largely follow the TCFD framework. Under SB 261, companies—both public and private—that do business in California with annual revenues of over $500 million must publish biennial online reports about their material climate-related financial risks and any measures they have taken to reduce and adapt to those risks. And SB 253 separately requires public and private companies doing business in California with annual revenues above $1 billion to publicly disclose their greenhouse gas emissions. Likewise, the EU framework applies to many companies based or listed in the European Union and to non-EU companies that undertake significant activity in the European Union. Covered companies must include in their annual management reports TCFD-aligned disclosures about their governance and management of climate-related risks, the impacts of these risks on their strategy, and related metrics and targets. (A recent Institute for Policy Integrity report compares the SEC, California, and EU regimes in more detail.)

The California and EU disclosure regimes cover many public companies in the United States. By California’s estimates, SB 261 will reach about 2,000 public companies and SB 253 will reach nearly 1,500 public companies. For context, some researchers estimate the total number of public companies in the United States to be around 3,750. The EU framework is estimated to cover at least roughly 3,200 U.S. companies, many of which are also public companies. Even if the SEC never finalizes its rule, companies subject to the California and EU regimes will now disclose much of the same climate-related information the SEC rule would require.

The SEC Rule Would Still Improve the Consistency, Comparability, and Reliability of Climate-Related Disclosures but for Less Cost than Anticipated

Despite the California and EU regimes, the need for consistent, comparable, and reliable disclosures across all public companies in the United States remains. And thanks to those new regimes, the proposed rule can now achieve this benefit at a cost lower than the SEC originally anticipated.

According to the SEC, the proposed rule’s main benefit is to provide investors with consistent, comparable, and reliable climate-related disclosures from all public companies in the United States. Absent a finalized SEC rule, companies that fall outside the reach of the California and EU regimes would not need to make any additional climate-related disclosures. Yet the need for consistent and comparable climate-related disclosures by all public companies is exactly why the SEC proposed the rule, even though it recognized that new climate-related disclosure regimes would continue to proliferate regardless. Now as before, the SEC rule would improve the consistency and comparability of climate-related disclosures across all public companies in the United States.

In addition, the SEC rule would likely enhance these disclosures’ reliability. Under federal securities law, incomplete or inaccurate disclosures in SEC filings can expose companies to a broader range of liability than comparable statements made in other settings. (By comparison, the California regime will not expose companies to the same range of liability, and the consequences of non-compliance with the EU framework will depend on how EU member states implement the framework.) This broader potential liability raises the stakes: It incentivizes companies to pay closer attention to their disclosures, improving the reliability of—and investor confidence in—these disclosures.

At the same time, many companies would now find it cheaper to comply with the SEC’s rule than the SEC originally anticipated. As the SEC noted, the proposed rule largely follows the TCFD framework, so companies that already make TCFD-aligned disclosures will have gathered much of the relevant information to comply with the SEC rule. This category now includes companies subject to the California and EU regimes (granted, some might have been making TCFD-aligned disclosures voluntarily). Compared to the costs they would have incurred when the SEC first proposed its rule, these companies would now face lower incremental costs to comply with the SEC rule.

In sum, the proposed rule’s main benefit—improved consistency, comparability, and reliability of climate-related disclosures across all public companies in the United States—remains, even if more of these companies must now provide disclosures under other regimes. But for many companies subject to the California and EU disclosure regimes, complying with the SEC rule would now cost less than originally anticipated. Far from eliminating the need for the SEC rule, the California and EU disclosure regimes lower its price tag.