What remains in the wreckage of the Climate Disclosure Rule

The SEC Climate-related Disclosure Rule appears to be dead, although the administrative process is still being worked through.

In brief

• Shifts in leadership have changed climate disclosure priorities, but material sustainability issues and compliance risks remain critical for registrants.
• Global sustainability rules require companies to strengthen disclosures, align materiality and improve governance for evolving legal and investor demands.

The change in presidential administration has caused a significant shift in the policy priorities of the SEC Chair and Commission. Under the prior administration, the SEC deployed its comment letter process to surface issues with existing climate-related disclosures and made sustainability themes a rulemaking and enforcement priority. That focus has ceased under the SEC’s new leadership. 

1. Expanding economic impacts

Issues connected to sustainability tend to vary in relevance across sectors; the material issues for extractives ought to look different from those in technology. But no sector is free of sustainability issues that have the potential to impact value across markets, geographies and time horizons. 

For example, to date, we’ve seen:

• Registrants disclosing analysis of trends in anticipated demand for their products being impacted by the expected trajectory of climate change which then cause revaluations of associated assets.

• Registrants that have identified a material dependence on a particular natural resource have provided commentary highlighting concerns that such resources may become expensive, more prone to interruption or scarce. 

Alongside these types of disclosures, we highlight a few illustrative examples that may generate economic impacts: 

• Industrial policy and trade barriers for sustainability: Several major markets are pivoting public policy to generate incentives toward decarbonization. Alongside the reset in trade, toward a more fragmented global market, several jurisdictions have either implemented or have under consideration sustainability-linked trade barriers. For example:
  • The EU’s Carbon Border Adjustment Mechanism charges import fees on greenhouse gas (GHG)-intensive commodities to both incentivize emissions reductions and protect EU manufacturers from high-emitting competition. 
  • The EU’s Clean Industrial Deal is rolling out more rigorous product labelling and limiting the export of certain critical minerals, which may impact business models in a variety of sectors.

• Minsky moment: A growing concern, reflected in policy initiatives by financial supervisory authorities around the world, is the impact of unpriced or radically underpriced climate risk that may result in a sudden and major decline in asset values (i.e., a “Minsky moment,” named after Hyman Minsky, renowned American economist). We are seeing an increase in a range of physical assets (such as residential property) that are now uninsurable due to climate-driven risks (from wildfires to floods). There is concern that this pattern of broad uninsurability will spread to much broader categories of assets and financial arrangements, causing such assets to be rapidly and significantly impaired or rendered uninvestable. This is one of the mechanisms driving the concern around a future climate change Minsky moment where previously unpriced risk suddenly is priced and results in a rapid and disorderly revaluation of assets, with broad implications from the health of corporate balance sheets to the stability of the financial system.¹

2. Several ESG reporting requirements

Even absent the SEC’s Climate-related Disclosure Rule, registrants are reporting on a broad range of sustainability-linked regulations. These often share a common root in terms of structure and themes but still present a variegated challenge to navigate and maintain a consistent and coherent disclosure stance. As the SEC previously noted, a significant proportion of registrants have been disclosing a large volume of sustainability-linked information voluntarily. In many jurisdictions, such voluntary disclosures will become mandatory. 

California is requiring GHG reporting (similar to that which would have been required in the SEC’s Climate-related Disclosure Rule) from companies doing business in the state; many SEC registrants will inevitably be caught by this requirement. Several other states have “copycat bills” based on California’s regulations at various stages in their legislative process. 

In addition, for SEC registrants with global operations, there are various cross-jurisdiction reporting requirements that may be applicable, including the EU CSRD and EU Taxonomy. The International Sustainability Standards Board (ISSB) requirements have been adopted, at least in part, by jurisdictions such as Mexico, Brazil and Australia (among many others), with the ISSB standards now also encompassing the previously independent standards) and the Sustainability Accounting Standards Board (SASB). Notably, many of these regulations are not limited to entities domiciled in those jurisdictions; several of these regulations have extraterritorial effects.