For far too long, the Securities and Exchange Commission—the nation’s top Wall Street watchdog—has responded only tepidly to the global climate crisis. This week, that finally changed. On Monday, the Securities and Exchange Commission (SEC) voted three-to-one to issue draft rules that will require publicly traded corporations to be more transparent with investors about their greenhouse gas emissions and how climate change may pose a risk to their businesses. While the proposed new climate disclosure rule is no panacea, it does represent an important step forward in terms of using market mechanisms to spur progress on climate action. 

The new rule has been a long time coming. In 2010, the SEC released interpretive guidance on climate-related disclosures, noting that climate is a material risk to investors and thus within existing reporting requirements. While the 2010 guidance proved instrumental to investors by formally recognizing climate risk and providing a foundation for shareholders to seek climate-related information through resolutions, its effect was limited. With no concrete guidance on climate disclosures, shareholders were left to sift through disparate climate reporting that varied in scope, specificity, location, and reliability. Companies, in turn, faced myriad disclosure requests and a wide array of available reporting standards to parse. Even the limited support provided by the 2010 guidance was eventually eroded under the Trump administration. 

Fortunately, the SEC under President Joe Biden has shown a much greater willingness to focus on climate risk and has adopted a data-driven approach to climate change. Right off the mark, the SEC established the SEC Climate and ESG Task Force. Its Division of Examinations quickly announced enforcement priorities on climate and ESG (that is, environmental, social, and governance) related risks, including the examination of mutual fund disclosures and proxy voting policies. The SEC also rescinded three staff legal bulletins issued during the Trump administration that complicated the filing, and agency review, of shareholder resolutions, and had the effect of excluding a significant number of climate-related resolutions.

The proposed rules announced this week are, by far, the most important reform for climate. In issuing the rule, Commissioner Gary Gensler underscored the importance of climate data to investors as they make investment and voting decisions. “If adopted, [the climate disclosure rule] would provide investors with consistent, comparable, and decision-useful information for making their investment decisions,” he said in the official statement announcing the proposal. 

The proposed climate disclosure rule ensures that data disclosures occur on a reasonable timeline as companies gather information about their emissions, assess climate risk, and develop transition plans. The rule makes phased-in climate disclosures mandatory, including Scope 1 and 2 greenhouse gas emissions for all companies, and material Scope 3 greenhouse gas emissions for the biggest corporations, including Fortune 500 companies. (Scope 1 emissions refer to a company’s direct emissions from their own operations. Scope 2 emissions are indirect emissions, such as from the electricity a company purchases. Scope 3 emissions are the indirect emissions from all other business activities—for example, emissions associated with suppliers and the emissions created when a customer burns fuel sold by an oil company.) 

In addition, information on carbon offsets or renewable energy certificates must be provided if a company employs them, as well as information as to how offsets are used. The rule, importantly, provides increasing assurance requirements for emissions data, but proposes a safe harbor from liability for Scope 3 reporting. Companies must provide data about any climate goals adopted, including what emissions are subject to such goals, deadlines for achieving them, and how goals will be met. Companies must disclose a price of carbon, if they use one. Companies must also assess climate-related risks and impacts. Altogether, the rule requires disclosure of the most critical information to investors’ understanding of a company’s climate risk, its climate impact, and its ability to thrive in an increasingly low carbon economy.  

These new mandates to protect investors couldn’t have come soon enough. 

Despite past failures, financial markets are an important lever for climate action as the magnitude of economic risk from a warming world becomes apparent. In a 2020 wake-up call, the US Commodity Futures Trading Commission noted that if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the global economy. The Swiss Re Institute, a research arm of the global insurance giant, projects that the world stands to lose close to 10 percent of total economic value by mid-century if greenhouse gas emissions stay on the current trajectory.

Financial markets have the power to price climate risk into global markets and compel companies to act more responsively to climate risk and opportunities. The UN Environment Program Finance Initiative (a group with 400 members and over $78 trillion in assets represented, and a lead actor in the COP26 climate financing discussions) is one among many financial organizations responding to the climate crisis. It concludes that there are many opportunities “to mobilize climate leadership, shape sustainable finance, and build back better.” The initiative is actively organizing global banks, asset managers, asset owners, and insurers to adopt Scope 1-3, net-zero climate targets. As these commitments are implemented, they will translate into higher costs of capital for carbon-intensive companies and reduced access to capital for the worst climate polluters.  

Investors too are acting on climate change. They understand that the companies they own are contributing an outsize portion of the greenhouse emissions causing climate change and that these companies have the power to collectively adapt and innovate to cleaner, safer ways of doing business. Companies themselves are coming to recognize the destabilizing nature of climate change—that a warming world is not conducive to business. But such recognition doesn’t automatically translate into action; companies continue to argue about how to address climate change, along what timelines, who should move first, and who will pay for action. 

Shareholders’ response is that companies across the board should begin addressing climate risk, and that the largest emitters must act now. Shareholders are making clear that companies that fail to disclose their full scope of greenhouse gas emissions, set Paris-aligned targets, and achieve 1.5-degree-aligned emissions reductions are becoming questionable investments. In turn, those companies that are proactively transitioning to thrive in a low-carbon economy are more likely to retain and grow their value. The spring 2021 shareholder rebellions at oil giants ExxonMobil and Chevron are perfect examples of how the investor winds are shifting. Shareholder votes on climate resolutions are additional proof of the seriousness of the climate issue to shareholders. Votes on climate proposals have increased from historical highs of 20 to 25 percent to frequent majority votes ranging as high as 98 percent—previously unheard-of levels of shareholder support.  

The newly proposed SEC climate disclosure rule will provide much needed guidance to companies, and greater climate transparency and data reliability to shareholders. In proposing this climate disclosure rule, the SEC has taken an important step forward in promoting the creation of uniform data on climate risk and greenhouse gas emissions.  

But the new SEC disclosure rule isn’t a magic bullet. It doesn’t prohibit climate emissions, and it doesn’t set emissions limits, nor does it require greenhouse gas reductions from companies. The rule simply ensures the reporting of climate progress—information that, until now, has been elusive. Sunlight, famously, is the best disinfectant. The new climate transparency required by the SEC should make a big difference in getting publicly traded companies to clean up their part of the greenhouse gas mess.