January 24, 2022

Environmental, Natural Resources, & Energy Law Blog

Risky Business: The SEC’s Plan to Expand Disclosure Rules for Climate Change-Related Financial Risks - Kate McCallum

Climate change poses significant risks to financial markets in the U.S. and around the world. U.S. regulators, including the Federal Reserve, acknowledge the need to identify and account for climate-related financial risks as a key policy priority,[1] with the Financial Stability Oversight Council (“FSOC”) declaring that climate-related risks present “an emerging threat to the financial stability of the United States”.[2] As the world learnt following the 2008 Global Financial Crisis, a threat to U.S. financial stability is a threat to the global economy. This highlights the importance of regulation to ensure the U.S. markets are resilient to climate-related risks, the key regulator being the Securities and Exchange Commission (“SEC”).

Damage from Hurricane Ida in Queens, New York, September 2021.
Photo by Jeenah Moon for the Washington Post:

The SEC was expected to announce a rulemaking proposal introducing mandatory climate risk disclosures for public companies by the end of 2021,[3] following a call for public comment on climate change disclosures issued in March 2021,[4] which received over 550 unique responses, more than three-quarters of which supported the introduction of mandatory rules.[5] The new rules are now likely to be announced in early 2022, with some sources suggesting that the rulemaking has been delayed by efforts on the part of the SEC to collect data and ensure its rulemaking is watertight in anticipation of legal challenges by both a coalition of Republican States and industry groups.[6]

The SEC should not be deterred by the prospect of litigation from setting firm rules which incorporate industry-specific guidelines, and which mandate the disclosure of climate risk in public companies’ Regulation S-K filings. Neither should the SEC give in to pressure by corporate and investor groups to allow for climate disclosures to be presented separately from other revenue and risk reporting requirements,[7] particularly given many climate-related financial risks are already subject to the Regulation S-K materiality disclosure requirements.[8]

The SEC has hinted at what the new rules might look like, including that they are likely to be mandatory, require disclosure of climate-related financial risks within companies’ Form 10-K filings,[9] and that they may require quantitative reporting that includes a company’s greenhouse gas emissions as well as an assessment of the financial impacts of climate change.[10] In addition to these key elements, the SEC should also look to incorporating international frameworks, such as the Task Force for Climate-related Disclosures,[11] to guide how companies should measure and report climate data and climate-related risks.

The urgent need for the SEC to take action to mandate climate change disclosures is clear in light of the significant economic impacts of the increasingly frequent and severe weather events hitting North America, from winter storms and hurricanes to record-breaking heatwaves and floods.[12] As noted by the FSOC, “[p]ublic, high-quality climate-related disclosures” by both companies that issue securities and financial institutions will better inform investors and other market participants about the climate-related risks to specific entities, industry sectors, and the financial system, protecting investors and ensuring fair, orderly, and efficient markets.[13]

Climate Change must be acknowledged as a Systemic Financial Risk

Once seen as part of the broader Environmental, Social, and Governance (ESG) framework, climate change is now acknowledged as a systemic financial risk to both the U.S. economy and financial system.[14] Climate-related risks impact nearly every sector of the U.S. economy,[15] in particular arising from infrastructure damage caused by extreme weather events.

These extreme weather events are an example of the physical risks associated with climate change, the economic costs of which include the loss of value of financial assets and increased liabilities.[16] The other category of climate-related risks is transition risks, driven by shifts in policies and regulations in response to climate change which again affect the value of a company’s financial assets and potentially increases its liabilities.[17]

Climate-related financial risks affect the government as well as the private sector. The Biden Administration acknowledged these risks early on in two key executive orders. In Executive Order 14008,[18] President Biden established a federal policy to “drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy”, as part of a whole-of-government approach to building resilience in the face of the climate crisis.[19] Executive Order 14030[20] focuses specifically on climate-related financial risks. It states that the failure of financial institutions to appropriately and adequately account for and measure climate-related risks “threatens the competitiveness of U.S. companies and markets” and sets out a new policy to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk”. [21]

Without the authority to direct the ostensibly independent SEC, Executive Order 14030 directs the federal government to “lead by example” to address climate-related financial risks by prioritizing federal investments and conducting prudent fiscal management. [22] This Order also commissioned the White House report, A Roadmap to Build a Climate-Resilient Economy,[23] published in October 2021, which outlines a climate risk accountability framework setting out core principles for addressing climate risk, as well as mapping out a list of executive actions to be taken in accordance with the Order. The report acknowledges that the SEC is developing recommendations for mandatory disclosure rules for public companies, but points to the importance of companies leveraging climate data to drive decisions and concrete actions, rather than treating it as algorithmic inputs.[24]

The Expanding Role of the SEC in Regulating Climate Risk

In 2010, the SEC published an interpretive guidance on how the issue of climate change affects existing SEC disclosure requirements for public companies, highlighting examples of areas where climate change-related risks may trigger disclosure requirements.[25] Analysis by the SEC as well as by academics shows that this guidance was sparsely enforced, and that it resulted in minimal changes in disclosure practices.[26] Under the leadership of its new Chair, Gary Gensler, appointed by President Biden, the SEC has taken several steps to address the inconsistency and gaps in climate risk reporting by companies.[27]

In addition to the call for public comment on new disclosure rules, in March 2021 the SEC announced an Enforcement Task Force focused on climate and ESG issues to crack down on material gaps or misstatements in public companies’ financial disclosures relating to climate risks.[28] In September 2021, the SEC released a sample letter to companies regarding climate change disclosures, referring back to the 2010 interpretive guidance and listing example comments which the SEC’s Division of Corporation Finance may issue to companies regarding their climate risk disclosure, or lack thereof.[29] This sample letter was followed by dozens of actual letters to public companies asking for further information on how climate-related risks might affect their financial earnings or business operations.[30] These letters show that the SEC is not waiting for new rules before requiring companies to treat climate risks as material risks.

Requiring consideration of climate-related risks is, however, only the starting point. To ensure comparable, consistent, and reliable disclosures, the SEC should establish a framework and/or standards to guide how companies measure and report climate data and climate-related risks. As SEC Commissioner Allison Lee recently foreshadowed, the SEC does not have to “start from scratch”, given that the quantity and quality of climate disclosures both in the U.S. and internationally has increased over the past decade, and in light of certain international frameworks which already guide companies’ disclosures and which can be used to ensure consistency across jurisdictional boundaries.[31]

What the New Rules Might Look Like

There are several open questions as to what the new climate disclosure rules might look like. These include (1) the location of climate risk disclosures, (2) what type of qualitative and quantitative disclosures will be required, (3) whether external standards from international bodies will be incorporated into the rules, (4) whether requirements will be industry-specific or include industry-specific metrics, and finally, (5) whether “safe harbor” provisions will be included to shield companies from legal or regulatory liability for their disclosures.[32]

Although the SEC is yet to officially announce any particulars of the pending rules, Chair Gensler has made several public comments over the past six months about what they will likely contain. In July 2021, speaking at a Climate and Global Financial Markets webinar, Chair Gensler said it is likely that the new rules will be mandatory, and that they will require disclosure of climate-related financial risks within companies’ Form 10-K filings.[33]

In October 2021, Chair Gensler told the House Financial Services Committee that the SEC is considering phasing in new requirements with tiered compliance for small versus large companies, with different standards.[34] He also hinted that the SEC may require quantitative reporting that includes a company’s greenhouse gas emissions as well as an assessment of the financial impacts of climate change, while some qualitative disclosures in respect of how climate risks and opportunities would be managed and incorporated into a company’s business strategy are also being considered.[35] Then, on December 7, 2021, Chair Gensler made another public comment about the pending rules, indicating that they will require companies to detail and measure commitments to mitigating climate change.[36]

What remains unclear are the details of what qualitative and/or quantitative disclosures will be required, whether standards will differ by industry, and whether international frameworks will be incorporated or referenced to guide the structure of reporting for climate risk disclosures.[37] Example frameworks include those published by the Task Force for Climate-related Disclosures,[38] the Sustainability Standards Board,[39] and the newly-created International Sustainability Standards Board, which on November 3, 2021 released two prototypes for climate-related disclosure requirements.[40]

As acknowledged by Ceres, a nonprofit organization working in climate change and investing, for the SEC’s new rules to be effective, they must create a clear, mandatory requirement for public companies to consider and report on climate-related risks within Regulation S-K filings, alongside disclosure of other material risks faced by the company and the general overview of the company’s business and financial results.[41] Further, to ensure consistency and comparability of disclosures and provide investors with the full picture of a company’s climate impacts, the new rules should prescribe both qualitative descriptions of risk management and quantitative data on each company’s greenhouse gas emissions data from across the company’s entire value chain (that is, Scope 1, 2, and 3 emissions).[42]

Requiring quantitative disclosure of greenhouse gas emissions is likely to be challenged by industry groups.[43] However, given the growing acknowledgment that climate risks are systemic financial risks, as well as international collaboration to reduce global emissions, the materiality of a company’s emissions footprint can no longer be cast into doubt. As the CEO of BlackRock, the world’s largest asset manager, remarked in the company’s 2021 annual letter to CEOs, “[t]here is no company whose business model won’t be profoundly affected by the transition to a net zero economy”.[44] Mandatory climate disclosure rules for public companies are an important step towards recognizing this reality.


[1] See e.g. Chair Jerome H. Powell, Statement of Chair Jerome H. Powell on the Financial Stability Oversight Council’s (FSOC) Report on Climate-Related Financial Risk, Bd. of Governors of the Fed. Reserve Sys. (Oct. 21, 2021), https://www.federalreserve.gov/newsevents/pressreleases/other20211021c.htm [https://perma.cc/4FYF-BU2C].

[2] Financial Stability Oversight Council, Report on Climate-Related Financial Risk, 11 (2021), https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf [https://perma.cc/H3FX-FA87] [hereinafter “FSOC Report on Climate-Related Financial Risk”].

[3] Andrew Ramonas, SEC Eyes Phased Approach to Climate Reporting, Gensler Says, Bloomberg Law (Oct. 5, 2021, 1:26PM), https://news.bloomberglaw.com/esg/sec-eyes-phased-approach-to-climate-reporting-gensler-says [insert permalink].

[4] Acting Chair Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures, U.S. Sec. & Exch. Comm’n. (Mar. 15, 2021) https://www.sec.gov/news/public-statement/lee-climate-change-disclosures [https://perma.cc/S2WV-7SFZ].

[5] Chair Gary Gensler, Prepared Remarks Before the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar, U.S. Sec. & Exch. Comm’n. (Jul. 28, 2021) https://www.sec.gov/news/speech/gensler-pri-2021-07-28 [https://perma.cc/E6TV-FPH7].

[6] Andrew Ramonas, SEC ‘Mission Creep’ on Climate Ups Republican Lawsuit Threats, Bloomberg Law (Jun. 29, 2021, 3:01AM), https://news.bloomberglaw.com/esg/sec-mission-creep-on-climate-ups-republican-lawsuit-threats [https://perma.cc/J8NS-SPKL]; James Ryder and Sharon Thiruchelvam, Litigation Threats Seen Delaying SEC Climate Disclosure Rules, Risk.net (Dec 1, 2021), https://www.risk.net/regulation/7903131/ litigation-threats-seen-delaying-sec-climate-disclosure-rules [https://perma.cc/J8NS-SPKL].

[7] Rachel Koning Beals, CEOs want SEC climate reporting separate from earnings but concede new rules are likely, MarketWatch (Jun. 16, 2021, 8:28AM), https://www.marketwatch.com/story/ceos-want-sec-climate-reporting-separate-from-earnings-but-are-largely-on-board-11623806764?mod=article_inline [https://perma.cc/2RQT-Z7UT].

[8] See Commission Guidance Regarding Disclosure Related to Climate Change, 75 Fed. Reg. 6290, 6296 (Feb. 8, 2010) (interpreting 17 C.F.R. pts 211, 231, 241) [hereinafter SEC 2010 Climate Change Guidance].

[9] Sarah Solum, Valerie Ford Jacob, and Michael Levitt, The SEC’s Upcoming Climate Disclosure Rules, Harv. L. Sch. on Corp. Governance (Sept. 1, 2021), https://corpgov.law.harvard.edu/2021/09/01/the-secs-upcoming-climate-disclosure-rules/ [https://perma.cc/4L2F-7GPP].

[10] Id.

[11] Task Force on Climate-Related Disclosures, TCFD Recommendations, https://www.fsb-tcfd.org/recommendations/.

[12] Christopher Flavelle, Climate Change Could Cut World Economy by $23 Trillion in 2050, Insurance Giant Warns, N.Y. Times (Apr. 22, 2021), https://www.nytimes.com/2021/04/22/climate/climate-change-economy.html [https://perma.cc/6DL4-G9E4]; Tyler Pager and Tony Romm, On stop in Colorado, Biden makes the economic case for his climate-focused agenda, Wash. Post (Sept. 14, 2021, 7:59PM), https://www.washingtonpost.com/politics/on-stop-in-colorado-biden-makes-the-economic-case-for-his-climate-focused-agenda/2021/09/14/62a09d34-1573-11ec-9589-31ac3173c2e5_story.html [https://perma.cc/SX2Z-6DVK].

[13] FSOC Report on Climate-Related Financial Risk, 67.

[14] The White House, U.S. Climate-Related Financial Risk Executive Order 14030: A Roadmap to Build A Climate-Resilient Economy (Oct. 14, 2021), https://www.whitehouse.gov/wp-content/uploads/2021/10/Climate-Finance-Report.pdf [https://perma.cc/9H95-WVJ2].

[15] U.S. Commodity Futures Trading Commission, Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission, 11 (Sept. 2020), https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf [https://perma.cc/5MZR-FR9L].

[16] Financial Stability Board, The Implications of Climate Change for Financial Stability, 4 (Nov. 23, 2020), https://www.fsb.org/wp-content/uploads/P231120.pdf [https://perma.cc/L5S7-YZFD].

[17] Id.

[18] Exec. Order No. 14,008, Tackling the Climate Crisis at Home and Abroad, 86 Fed. Reg. 7619 (Jan. 27, 2021).

[19] Id. at Sec. 201.

[20] Exec. Order No. 14,030, Executive Order on Climate-Related Financial Risk, 86 Fed. Reg. 27967 (May 20, 2021).

[21] Id. at Sec. 1.

[22] Id. at Sec. 1.

[23] The White House, U.S. Climate-Related Financial Risk Executive Order 14030: A Roadmap to Build A Climate-Resilient Economy (Oct. 14, 2021), https://www.whitehouse.gov/wp-content/uploads/2021/10/Climate-Finance-Report.pdf [https://perma.cc/5NDG-BFDM].

[24] Jacob Hupart, SEC Commissioner Lee Highlights Role of Prior Efforts in Develop SEC Climate Disclosure Regulations, Nat. L. Rev. (Oct. 23, 2021), https://www.natlawreview.com/article/sec-commissioner-lee-highlights-role-prior-efforts-develop-sec-climate-disclosure [https://perma.cc/63PT-CG7J]; see also Task Force on Climate-Related Disclosures, Support the TCFD, https://www.fsb-tcfd.org/support-tcfd.

[25] SEC 2010 Climate Change Guidance.

[26] Hana V. Vizcarra, Entering a New Era in Climate-Related Disclosures and Financial Risk Management in the U.S., Harvard Law School (Feb. 17, 2021), http://eelp.law.harvard.edu/wp-content/uploads/Vizcarra-ALI2021-ClimateFinanceRiskOutlook.pdf [https://perma.cc/U697-CZKE]; see also Colin P. Myers, A renewed focus on the SEC’s Guidance regarding disclosure related to climate change, American Bar Association (Apr. 12, 2021), https://www.americanbar.org/groups/environment_energy_resources/publications/ed/20210412-a-renewed-focus-on-the-secs-guidance-regarding-disclosure/ [https://perma.cc/9SH9-6ZFW].

[27] Chair Gary Gensler, Prepared Remarks Before the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar, U.S. Sec. & Exch. Comm’n. (Jul. 28, 2021) https://www.sec.gov/news/speech/gensler-pri-2021-07-28 [https://perma.cc/E6TV-FPH7].

[28] Press Release, Securities and Exchange Commission, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-42 [https://perma.cc/4HEW-9WPM].

[29] Securities and Exchange Commission, Sample Letter to Companies Regarding Climate Change Disclosures (Sept. 22, 2021), https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures [https://perma.cc/4CME-XKP3].

[30] Paul Kiernan, SEC Asks Dozens of Companies for More Climate Disclosures, The Wall Street Journal (Sept. 22, 2021), https://www.wsj.com/articles/regulators-ask-dozens-of-companies-for-more-climate-disclosures-11632341672 [https://perma.cc/R842-ZKSS].

[31] Id.

[32] Solum, Jacob, & Levitt, supra note 9.

[33] Id.

[34] Ramonas, supra note 3.

[35] Id.

[36] Katanga Johnson, U.S. SEC chair Gensler says new climate risk rules will require companies to detail, measure commitments to mitigating climate change, Reuters (Dec. 7, 2021, 11:42AM), https://www.reuters.com/article/usa-sec-gensler-climate/u-s-sec-chair-gensler-says-new-climate-risk-rules-will-require-companies-to-detail-measure-commitments-to-mitigating-climate-change-idUSKBN2IM1UM [https://perma.cc/2KDB-3GHD].

[37] Solum, Jacob, & Levitt, supra note 9.

[38] Task Force on Climate-Related Disclosures, TCFD Recommendations, https://www.fsb-tcfd.org/recommendations/.

[39] Sustainability Accounting Standards Board, SASB Standards, https://www.sasb.org/standards/download/.

[40] Technical Readiness Working Group, International Financial Reporting Standards Foundation, https://www.ifrs.org/groups/technical-readiness-working-group/#resources.

[41] Letter from Mindy S. Lubber, CEO/President, Ceres, Inc. to Vanessa Countryman, Sec’y, SEC, Public Input on Climate Change Disclosures (Jun. 10, 2021), https://www.sec.gov/comments/climate-disclosure/cll12-245664.pdf [https://perma.cc/Z5N6-VDDP].

[42] See Letter from Arvin Ganesan, Global Energy and Environmental Policy, Apple, to Vanessa Countryman, Sec’y, SEC, Request for Public Input on Climate Change Disclosures (Jun. 11, 2021), https://www.sec.gov/comments/climate-disclosure/cll12-8915594-244828.pdf [https://perma.cc/GG2M-RR8W].

[43] Ryder & Thiruchelvam, supra note 6.

[44] Larry Fink, Larry Fink’s 2021 letter to CEOs, BlackRock (2021) https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter [https://perma.cc/F4TS-HD2P].