The SEC and Climate Risk

Abstract

The time has never been better for the Securities and Exchange Commission (SEC) to regulate climate change disclosures. However, the agency has a poor track record in mandating climate and other specialized disclosures from public corporations. Its 2010 guidance on climate-related disclosures was sparsely enforced. Its 2012 conflict minerals rule was partially invalidated by the courts, and in 2019 and 2020 the agency failed to include climate disclosures when modernizing rules and guidelines on corporate disclosures. These past failures were due to agency inertia, which was facilitated by a combination of lack of political feasibility, strong business resistance to specialized disclosures, and rising judicial hostility to the SEC. These past failures should not dictate agency approaches to climate disclosures moving forward. Regulating climate change is high on the agenda of the Biden Administration. Investors are demanding that public corporations be more transparent about climate-related risks. The SEC is starting to act, issuing a call for public input on climate-related disclosures and enhancing its focus on climate-related disclosure in public company filings. These political, investor, and agency shifts are primarily due to the rising awareness of the potential systemic nature of the risks of climate change to financial systems both in the U.S. and internationally. This article assesses the policy feasibility of climate-related disclosure rules. It argues that past SEC failures can and should inform SEC rulemaking on climate change disclosures moving forward. Regulating climate disclosures benefits not only investors and capital markets, but also companies, due to the systemic nature of climate risk. This article argues that robust cost-benefit analysis, and a flexible but firm regulatory approach which is industry-specific, will improve policy feasibility.