The federal government plans to scrap requirements for companies to disclose climate risks to investors, but investors say the choice to cut out global warming could leave them out in the cold.
Last month, the Securities and Exchange Commission’s proposed dropping a Biden-era regulation that required companies that trade on the stock market to disclose their climate-related business risks and any plans to mitigate them. The decision reflected the SEC chair’s conviction that investors in publicly traded companies don’t actually benefit from the information.
But advocates for sustainable investing and asset managers alike disagree.
They say investors need a clear picture of how companies are navigating and planning for disruptions to their businesses and supply chains from global warming and policies to address it. They say that repealing the SEC rule will make those disclosures more ad hoc and uneven and will prevent markets from pricing in emerging climate risks.
“It’s just going to leave investors worse off in allocating their money, which rewards management of certain companies that would prefer to have investors less informed, but it disadvantages other companies,” said Amanda Fischer, policy director at Better Markets. “So, from a marketwide perspective, it just makes capital allocation less efficient.”
A hotel chain might have assets in areas that are vulnerable to sea-level rise. A shipping company may see disruptions when the Panama Canal reduces traffic to conserve water during a drought. Agriculture companies might see labor disruptions when extreme heat forces them to cut workers’ hours. Insurance companies might see rising property and casualty insurance payouts that force them to raise rates or exist certain markets.
“We have a system of standard finance reports — balance sheets, income statements,” said Steven Rothstein, CEO of the sustainable investment advocacy group Ceres. “And that way, if you’re an investor, you can compare one company to another by looking at the same kind of metrics.”
The SEC, however, said the Biden-era rules were “unnecessary” and imposed costs on public companies and their shareholders that were “not justified by the informational benefits they may provide to some investors.”
In securities law, information is “material” if it is likely to affect an investor’s assessment of a company’s value or its future risks and earnings. Companies that trade publicly are required to disclose material information.
Some investors value transparency about climate-related business risks a company might anticipate or be planning for, just as they do information about other labor, market or policy risks that might impact its operations or profitability, Rothstein said.
“Then there are transition risks, like the extent to which states or the U.S. government adopt legislation requiring the U.S. to transition away from fossil fuels,” noted Fischer, who served as chief of staff to the SEC during the Biden administration. “That would impact some companies negatively and some companies positively.”
The Biden-era SEC rule required public companies to disclose those risks, plans to manage them and any targets or goals for decarbonization on mitigation. Requirements to report greenhouse gas emissions applied only to the largest companies, and only when they were material.
There’s evidence that institutional investors want mandatory reporting of climate risks.
A 2022 Ceres analysis found that of the 370 asset owners and asset managers who filed comments that year on the SEC’s draft, the overwhelming majority were supportive of requirements for greenhouse gas disclosure that were even more stringent than those the commission ultimately adopted.
“Climate change is a substantial risk that is material to investors. Making such a risk part of financial disclosures will improve data quality and allow investors to address such risk through asset allocation, voting, or engagement,” stated the California Public Employees’ Retirement System, or CalPERS, the nation’s largest pension system, in 2022 comments to the SEC.
Wellington Management, an independent investment management firm, called climate risk disclosure “critical” to its “ability to make informed investment decisions on behalf of our clients.”
“Because climate change will continue to profoundly impact society, economies and markets, investors need more information to better price these risks and fully assess the value of an issuer’s securities,” it stated. “Currently, our evaluation of the positive and negative impacts of climate change on issuers is limited by inadequate information and the absence of a standardized framework for disclosure.”
The SEC did not respond to requests for comment, including more information about why the commission deemed climate risks to be immaterial. The commission is currently taking public comment on its proposal to jettison the disclosure rule until Aug. 3.
The May 29 repeal proposal was long expected.
SEC Chair Paul Atkins made it clear he wants to drop the requirements.
During his Senate confirmation hearing last year, Atkins said that rules like the one on climate disclosure were a liberal attempt to use “other people’s money to try to influence corporations through the distortions of the corporate governance process.”
“So that will end,” he promised the Senate Banking Committee.
The Trump administration declined to defend the 2024 rule against industry challenges. And the SEC — an independent agency that regulates securities markets — said last year that challenges to the rule should continue to be heard anyway by a right-leaning federal appeals court in Missouri. A court decision striking down the standards would help salt the earth and prevent the commissions from issuing similar standards in the future.
The rule was paused in 2024 pending litigation.
Years before Trump tapped him to lead the SEC, Atkins, who had served on the commission during the George W. Bush administration, penned a Wall Street Journal op-ed with first Trump-term regulatory chief Paul Ray in which they argued the climate disclosure proposal would demand companies furnish information that is not “financially significant to the reasonable investor.”
He echoed that sentiment when announcing the proposed rescission last month, stating that SEC disclosure rules would “be guided by materiality as the North Star, avoid the practical effect of dictating corporate behavior, and be imposed only when the expected benefits justify the likely costs and burdens.”
“The theme is this idea that climate change is ‘woke,’ and that it doesn’t have any impact on investors or companies,” said Danielle Fugere, president of As You Sow. “Which, of course, is absurd. We’re already paying hundreds of billions of dollars for climate catastrophes.”
Not the end
If the rule is rescinded or overturned in court, that won’t be the end of climate disclosure by public companies.
Environmental disclosure nonprofit CDP reported last year that up to 80 percent of S&P 500 companies already disclose climate information. And a broad swath of U.S. companies may be covered under current and pending climate disclosure rules in jurisdictions in which they operate, like the European Union and California.
Fischer, who served as SEC chief of staff during the Biden administration, said the recission would not relieve public companies of the legal requirement to disclose all material information — including that regarding climate change.
But experts say the quality and format of voluntary disclosures has varied.
Lee Reiners, a lecturing fellow at Duke University’s Financial Economics Center, said many companies discuss their climate plans and challenges in curated environmental, social and governance reports — “glossy marketing brochures” — instead of annual submissions to the SEC.
The climate disclosure rule was intended to make those reports clear and comparable, so they could inform decisions, he said.
“An issuer of securities will always have asymmetric information. They’ll always know more about the company — the risk involved in investing in that company’s stock or bonds — than investors,” he said. “So, disclosure is what levels that playing field.”
“There’s still demand for the information from the investor community,” he said. But with the repeal of the climate disclosure rule, “it’s just not again consistent, comparable or reliable, and it makes it harder for investors to compare across companies.”
