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SEC Rule on Climate Disclosure Nears Next Step

One of major next steps for ESG is the implementation of uniform standards, which will allow companies to be more confident in their reporting and investors to better understand the data.

The SEC is in full motion towards that goal with its pending climate disclosure rule. The rule received a significant wave of comments last year, primarily from corporations that are concerned about the work and resources required to comply with the rule. The SEC’s final version will likely be scaled down from the original, although it will still be designed to promote transparency.

SEC Chair Gary Gensler emphasized this point at a recent Council of Institutional Investors event. As summarized by Pensions & Investments (Gensler says SEC climate disclosure rule will focus on consistency), Gensler noted that:

"The reason the public is so engaged in this is because investors currently are making investment decision based upon climate risk disclosures companies are making...So though we're merit neutral, and there are people around these debates that want to push one agenda or another, our only remit is about full, fair and truthful disclosure and try to bring some consistency to the disclosures that are already in the mix."

What Does This Mean for Investors?

Investors should understand that over time, companies will be reporting more comprehensively on emissions (and possibly other ESG factors). Hard and fast rules will reduce the risk of greenwashing and lead to better research on how companies are responding to climate risk.

What Should Advisors Do?

If clients are confused or concerned about headlines charting the SEC’s progress, advisors can assure them that while the climate risk disclosure rule represents a change, it is in step with the rest of the world. Europe introduced its Sustainable Finance Disclosure Regulation in 2021, Japan requires certain companies to comply with mandatory climate risk disclosure requirements aligned with the Task Force on Climate-related Financial Disclosures, and Canada is heading in the same direction.

Change is certainly hard, however the SEC's moves will better align the U.S. with the global community.

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