As the economy progresses into an era marked by concern for climate change, investors and consumers are increasingly demanding action and focusing their attention on climate change. Publicly traded companies are not currently required to disclose information explaining their exposure to climate change to investors and the public. (Rachel Layne, CBS News). However, this voluntary disclosure may become mandated by the Securities and Exchange Commission (“SEC”) in the immediate future. (Dave Michaels, Wall Street Journal). 

The SEC is considering a rule that would require public companies to report metrics that indicate a public company’s exposure to climate change. (Allison Lee, U.S. Securities and Exchange Commission). President Biden’s Administration is making these measures a “top priority.” (Dave Michaels, Wall Street Journal). On Monday, June 21, 2021, President Biden met with the Chairman of the SEC Gary Gensler, Treasury Secretary Janet Yellen, and the Chairman of the Federal Reserve Jerome Powell, to discuss potential SEC reporting requirements. Id. President Biden is hopeful that implementing concrete rules will encourage more investment in companies that are conscious of their impact on the environment. Id.

The SEC has not officially announced these potential reporting requirements yet, but some commentators speculate that the potential reporting requirements that may be adopted by the United States will be similar to those recently enacted by the European Union (“EU”). (Kevin Dowd, Forbes). The EU adopted the Sustainable Finance Disclosure Regulation (“SFDR”) on March 10, 2021. Id. The SFDR requires certain institutional investors, including venture capital groups, asset managers, and pension funds to disclose metrics that summarize their exposure to climate change. Id.

To date, there have been mixed reviews on the prospect of additional reporting requirements in the United States. Investors are almost universally in support of the implementation of additional reporting requirements. (Dave Michaels, Wall Street Journal). Retail and institutional investors alike agree that that adequate information is not available regarding public companies’ exposure to climate change risk. Id. Several large companies have even expressed support for the additional reporting requirements. (Rachel Layne, CBS News). For example, Dell Technologies has described the current regime as convoluted and “complex,” and expressed some interest in more measures being implemented. Id. Other advocates, including Investment Company Institute, have cited the immense cost of responding to individual requests from investors pertaining to sustainability. Id. A uniform, definitive rule would drastically reduce, or entirely eliminate, that expense. Id. In addition, because reporting is entirely voluntary, many companies do not disclose information that could be construed by the public as irresponsible. (Dave Michaels, Wall Street Journal).  

Parties opposing the creation of a climate risk disclosure rule have a few arguments. First, they argue that many companies already voluntarily disclose this sort of information. (Dave Michaels, Wall Street Journal). Approximately ninety percent of the companies that comprise the S&P 500—a  market-capitalization-weighted index of the 500 largest U.S. publicly traded companies—publish reports that include metrics like carbon emission. Id. Second, some, including, Andy Pitts-Tucker, the managing director of the ESG Ratings & Advisory sector at Apex Group, have described the data as inherently unreliable because it is not as concrete as other metrics that companies are already required to report like financial data. (Rachel Layne, CBS News). Third, reporting unreliable data could render a company financially liable to their shareholders and other private parties pursuant to the Securities Exchange Act of 1934. Id. Some experts are skeptical that investors will be not able to make sense of climate disclosure data by public companies because the data is very complex. Id. Fourth, large corporations fear investors will put too much stake in a single metric such as emission. Id. Finally, other entities argue that their environmental impact is marginal, and that any further reporting requirements would result in additional costs without any form of financial return. (Kevin Dowd, Forbes). Opponents also argue that a company is in the best position to assess what material disclosures would be most relevant and needed by prudent investors. (Katanga Johnson, Reuters).

Ultimately, a reporting requirement will be implemented – the question remaining is what the requirement will look like. Investors will have more information available when deciding where to invest their capital. However, there are also significant drawbacks and concerns. A climate disclosure reporting requirement will disproportionately affect smaller entities in a more negative manner in comparison to larger entities because of the time and money required to compile the relevant data. A single, uniform rule is also not the most efficient approach because at the end of the day, some industries inherently have more exposure than others. In addition, this information is complex and not as concrete as other data that companies are required to disclose to the SEC. Thus, the SEC should implement climate risk reporting requirements contingent upon a public company’s expected or assumed financial exposure and the size of the company.