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Does the SEC climate rule really matter? Investors will still demand disclosure

Attacks against ESG reporting have done little to dampen investors’ demand for consistent and comparable sustainability information.

Regulations concept art

Image via Shutterstock/ESB Professional

As the U.S. Securities and Exchange Commission finalizes its rule to standardize climate-related disclosure, how should companies and investors prepare? 

One key takeaway from a GreenBiz 24 tutorial packed with sustainability professionals this week: The work on collecting, analyzing and disclosing sustainability data is marching on, regardless of how a new regulatory regime takes shape. 

Attacks on the SEC’s proposed policy have done little to dampen investors’ demand for consistent and comparable sustainability information. As the representative for one institutional investor — a "universal owner" who can’t diversify away from system risks such as climate change — recently pointed out, regulation is important. Getting corporate data about the impact of climate risks is more important.

The idea that financial statements are the be-all, end-all of investment analysis isn’t true anymore, as Allison Herren Lee, a former SEC commissioner who now represents whistleblowers at law firm Kohn, Kohn & Colapinto, told me last week.

Thresholds are already in place

Regulation in Europe and California, itself the world’s fifth-largest economy, have established disclosure policies companies will need to meet regardless of what form the SEC rule — now expected in April — actually takes.

Under the European Union’s Corporate Sustainability Reporting Directive, all organizations listed in an EU-regulated market with 500 or more employees must start reporting in 2025 with data for the 2024 financial year. Other large companies will be required to do the same in subsequent years, followed by small and midsize enterprises. 

California’s rule mandates that any company generating annual revenue of over $1 billion that does business in the state measure and publicly report Scope 1 and 2 greenhouse gas emissions starting in 2026, and begin disclosing Scope 3 emissions starting in 2027.

The argument for waiting

Companies unsure of whether to sit on the sidelines could make the case to wait things out. 

The European Council on Foreign Relations foresees a significant populist radical-right shift, gaining seats across the European Union in 2024 as center-left and green parties lose out. A conservative majority would very likely oppose climate action. 

What’s more, while European climate regulations are a big step forward, they "don’t have a mechanism to enforce in a way that would level the playing field between the rule followers and rule breakers," said Lee. 

As for the California rule, the U.S. Chamber of Commerce, a powerful trade organization that spends big to lobby against climate progress, sued late last month seeking to overturn the state’s climate disclosure legislation. It claims that the "days of California setting the standard for the rest of the nation" are over. 

Some possible scenarios

Those anticipating the SEC’s rule suggest the final version will be watered-down from drafts. For example, the agency could dispense with a requirement for Scope 3 emissions disclosure, the source of 75 percent of company emissions on average.

The SEC rule might also back away from asking companies to quantify and identify climate impacts — the financial impacts from physical and transition risks — in their financial statements. 

What would become of the accountability sought on climate if the SEC backs off on those proposals? The reality is that investors will still demand and expect consistent and comparable sustainability information.

Even in a worst-case scenario in which the SEC’s proposed rule is stalled or struck down by an appeals court, the surge of domestic investor pressure for this information would be massive, another former SEC staffer told me. 

Customers will demand this data, too. IT infrastructure services provider Kyndryl recently found, in collaboration with Microsoft, that customers are the most vocal in advocating for sustainability practices, followed by employees, investors and government regulators.

Whatever form the new regulatory regime eventually takes, the sustainability "journey" won’t be an abstract or aspirational one. Just ask your investors and customers. 

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