Companies will soon have to disclose how they’re managing climate-related risk.

By Alexandra Thornton

A long-overdue step toward giving investors crucial information to make informed decisions

Amid more costly climate disasters and a global transition to cleaner energy, investors in the U.S. and abroad are demanding more information about how businesses are handling these threats.

In response, the U.S. Securities and Exchange Commission (SEC) just released a final rule requiring public companies to disclose information about climate-related risks that impact their business operations or financial condition.

While imperfect, the SEC rule is well within the agency’s authority and is an important and long-overdue step toward giving investors the information they need to make informed decisions.

Yet in one of many lawsuits filed by opponents, a U.S. appeals court ruling last week paused the implementation of the rule, which the SEC has called unnecessary since compliance under the rule is not required until 2026.

Significant progress

Many responses to the SEC’s rule have rightly focused on the omission of Scope 3 emissions, which are the greenhouse-gas emissions associated with a company’s suppliers and product users – a key proxy for a company’s resilience in the energy transition. This and other important disclosures were included in the original March 2022 SEC proposal, but dropped by the time the final rule was unveiled last week.

My colleagues and I at the Center for American Progress have been following this rule closely and submitted a comment letter to the SEC when it was first proposed. While it’s tempting to focus on what’s missing in the final rule, we should acknowledge the significant progress the SEC has made in passing this.

Specifically, the rule requires the assessment and disclosure of essential climate-related information that should be able to withstand legal attacks from detractors. As a comment letter to the SEC from 30 law professors stated, “The plain text, legislative history, and judicial interpretation of the securities laws support the Commission’s authority to mandate climate-related disclosures.” The commission could have gone further; still, the company’s disclosures of its rule mandates will surely improve investors’ ability to value securities.

While companies have been required to disclose material environmental risks for some 50 years, the lack of more specific prescribed disclosures has allowed companies and their accountants to avoid those requirements. This new rule’s mandated disclosure framework should raise the floor on climate risk disclosure in the marketplace. And although the commission weakened some of the provisions in the original proposal by enabling companies to avoid some disclosure if they determine it immaterial to investors, the rule’s more detailed disclosure provisions will enable the SEC’s enforcement division to engage with companies and probe whether there have been material misstatements and omissions.

Investors will have greater insight into a company’s longer-term commitment to clean energy.

The rule further requires companies to explain to investors whether and how they’re integrating consideration of climate-related risks into core business functions. While these disclosures will not be included in audited financial statements, they will provide investors with greater insight into a company’s longer-term commitment to successfully navigating the clean energy transition. Many large companies have been making these types of disclosures for years, following recommendations from the Task Force on Climate-related Financial Disclosures. Mandating similar disclosures in the U.S. public disclosure framework will provide investors with more comparable information.

In addition, requiring the disclosure of gross losses – instead of the losses remaining after accounting for insurance recoveries – due to severe weather events will help investors determine whether firms are adequately insured. It will also provide more insight into the company’s risk management strategy for future severe weather and other natural conditions, such as sea level rise.

Importantly, the rule will help investors understand how all this information relates to a company’s financial health. Until now, many companies have failed to properly account for the impacts of severe weather events and the transition to clean energy on their financial statements. For companies subject to this rule, expenditures written off during the current year related to mitigation and adaptation activities must now be disclosed in a note to the financial statements.

Companies will also be required to include a note about how the impacts of future severe weather events and activities…