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The SEC did a sensible thing on climate change. A right-wing campaign is trying to kill it.

Even a Wall Street-endorsed climate rule is facing serious headwinds.

A Wall Street sign with the New York Stock Exchange building behind it displaying American flags.
The New York Stock Exchange (NYSE) is pictured on April 20, 2020, at Wall Street in New York City.
Johannes Eisele/AFP via Getty Images
Rebecca Leber is a senior reporter covering climate change for Vox. She was previously an environmental reporter at Mother Jones, Grist, and the New Republic. Rebecca also serves on the board of the Society of Environmental Journalists.

As drought spreads and sea levels rise, the economic impacts of climate change will run in the trillions of dollars. The insurance firm Swiss Re projects climate disasters would cost the world as much as $23 trillion by 2050, bigger than the impact from the pandemic and the Great Recession of 2009 combined.

It’s reasonable business planning to account for all this foreseeable risk just like planning for cyberattacks or business disruptions from a pandemic. Last year, for instance, the US had to spend $145 billion dealing with floods, fires, and other climate-related disasters.

Yet somehow, climate change has fallen through the cracks of US financial regulation. Publicly traded companies are required to disclose information about “material” risks that affect their company regardless of their cause, from sanctions to supply chain chaos. But there are no uniform standards for disclosing how much fossil fuel pollution they generate or the impact that climate change could have on their future growth. Instead, companies have been left free to inflate their environmental progress, all with little scrutiny from the public.

This kind of information is, in theory, essential to a functioning free market, so investors can make decisions based on complete information. But fossil fuel interests, conservative ideologues, and corporate trade groups are striving to keep shareholders in the dark on climate risks.

The Biden administration is trying to make companies more publicly accountable for the risk of the climate crisis. A linchpin of Biden’s plan is a draft rule the Securities and Exchange Commission (SEC) proposed in March. Over 500 pages, the SEC rule proposes that publicly traded companies disclose how climate change affects their business outlook and identify a board member or board committee to focus on climate-related risks.

Once the rule is finalized, companies will have to disclose how their operations are affected by extreme weather events and the impact of climate change on the short- and medium-term business outlook. They’ll also have to report the emissions both from their company’s operations and from how their products are used. This is particularly bad news for fossil fuel companies with business models predicated on selling pollution. Until this rule, they haven’t had to fully account for the environmental impact from things like selling gas that’s burned by consumers’ cars.

“This is a rule, in other words, that helps the free market act like the free market, giving investors exactly the information they need to make the decisions,” Emory University business law expert George Georgiev said.

As the draft rule’s comment period came to a close, it’s clear any regulation on climate change faces serious headwinds. The loudest protests have come from right-wing groups and corporate-aligned nonprofits that have flooded the public comments with previews of the argument they’ll take to courts.

Plenty of businesses in the financial sector stand to benefit from this rule, like the investing giant BlackRock, which has pledged to align its assets with climate goals. But some could be hurt. The companies that benefit from greenwashing their climate commitments are doing everything they can to protect the chaotic status quo.

Financial transparency on climate change is hardly a radical idea

The SEC has required and standardized public company disclosures since 1933. In recent decades, the SEC has issued nonbinding guidance on how publicly traded companies should consider Covid-19 disruptions, Russia’s invasion of Ukraine, and even a feared “Y2K” meltdown at the turn of the 21st century, so the companies would meet their fiduciary duty.

But the SEC has been painfully slow on climate change. Right now, businesses disclose the risks and costs of their business on the climate on a voluntary, patchy basis with no clear standardization.

A 2020 Government Accountability Office surveyed 32 midsize and large publicly traded companies and found little consistency. Airlines, for example, used years anywhere between 1990 and 2017 as the baseline for calculating their climate footprint. Water companies have used completely different measurements for reporting water extraction. Some companies would just report carbon emissions, while others would report total greenhouse gas emissions (including sources like methane).

The proposed SEC rule cites other evidence of companies not paying attention to this risk, like an internal survey of climate-related keywords in companies’ 10-Ks between June 2019 and December 2020. They found only 31 percent mentioned climate change at all.

This information is not just to benefit climate change efforts; it is also useful to investors. It makes clearer, for instance, that a retail company’s warehouses might be threatened by increased flooding, that an airline company might have to ground more flights because of rising heat waves, or that a bank’s backing of major fossil fuel expansion has the strong chance of backfiring in a world that transitions to renewables. Without any regulation and standardization, companies will just continue to try to outshine one another on their environmental and social commitments without hard data to back it. This mismatch will become an existential risk to financial instability if, for example, extreme weather pummels a business that did not prepare accordingly.

Environmental activists have pushed for more from companies by proposing shareholder resolutions at annual meetings that ask for more transparency, but have met with mixed success in shareholder votes that don’t bind the company to taking action.

In this regulatory vacuum, voluntary global affiliations have cropped up, including the Net Zero Assets Managers Initiative, representing some $43 trillion in assets, and Climate Action 100+, representing more than $60 trillion. Another of these groups is run out of the Financial Stability Board as a Task Force on Climate-related Financial Disclosures (TCFD), a voluntary system that has grown to more than 3,000 companies. The task force’s recommendations tell companies to consider the short-, medium-, and long-term climate impacts, emissions that result from investment decisions, and their operations’ pollution, and account for the changing climate’s consequences for the business. The hundreds of companies that voluntarily comply with these standards aren’t necessarily green or good for the environment, but it’s an extra gold star for their sustainability transparency.

Eight countries, including the UK, have passed laws that will mirror the TFCD’s recommendations, but the US would remain an outlier without the SEC rule. “Investors put their money where they think there’s a good opportunity and good information,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. “If we don’t have good information, we run the risk of falling behind internationally.”

The SEC’s rule is basically the US playing catch-up, based on standards the mainstream corporate community aligned with TFCD have already backed.

Initially, companies will have to spend extra to comply with the rule — up to $530,000 a year for larger companies by the SEC’s estimate, but it will vary depending on how much companies are doing already on climate disclosure. Typically, the costs of rules shrink over time. Otherwise, the rule itself is quite modest. The SEC is “not saying you should or shouldn’t invest in climate products,” Rothstein said. “They’re just saying, tell investors what you’re doing and do it in a consistent way.”

Environmentalists and some Democratic lawmakers argue the SEC could be doing even more. The SEC does not change how companies disclose climate-related activities like PR campaigns and political influence, the kind of activities that tend to be outsourced to nonprofits that shield their activities from the public. In March, Sen. Sheldon Whitehouse (D-RI) called it a “failure of nerve that shies away from a perfectly legal, necessary response to the climate danger we face” because political efforts remain “the single most material disclosures a company could make to achieve climate safety.”

Right-wing groups claim financial transparency is an attack on free speech

Unsurprisingly, the SEC is facing immense pressure to withdraw this rule because of the same shadowy political spending that companies don’t have to disclose in the first place. Groups like the US Chamber of Commerce, the National Association of Manufacturers, Americans for Prosperity, and the Competitive Enterprise Institute have flooded the SEC with comments that argue company free speech would be violated.

Trade groups and right-wing think tanks have argued that requiring companies to report these emissions is akin to violating their First Amendment rights of free speech, pointing to a court case that ruled a regulation requiring the disclosure of conflict-zone minerals would amount to “compelled speech” and violated the companies’ rights.

The American Petroleum Institute, the oil industry lobby, has argued the rule “could raise serious First Amendment issues under recent applying strict scrutiny to content-based laws compelling speech.”

The argument has found purchase with conservative lawmakers, like West Virginia Attorney General Patrick Morrisey, who picked up the argument in his 2021 letter to Treasury last year. In Congress, 19 Republican senators argued in their submitted comments that the rule is “not within the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Another 40 Republican representatives wrote that the rule will act to “undermine and shame public companies,” while Republican attorneys general describes the rule as a “total reordering of [the SEC’s] present disclosure regime.”

The attack on regulation under the guise of First Amendment rights has become more familiar in recent years. “Unfortunately, the Supreme Court has been steadily giving corporations more and more leeway, more and more rights,” said Ciara Torres-Spelliscy, a corporate law expert who has published several books on corporate speech.

The court also opened the door to more of these lawsuits, striking down a California law that required nonprofits to disclose their donors, siding with the Americans for Prosperity Foundation’s argument against disclosing their donors and providing IRS 990 forms to the state. Other legal challenges to campaign finance laws and unions have used the First Amendment.

Legal experts supportive of the SEC rule consider the argument a long shot in courts. “I think that argument is really far-fetched,” Emory’s Georgiev said.

But it’s still worrisome. If it succeeds, whether in courts or as a scare tactic to get the SEC to backtrack, it sets a dangerous precedent for the financial system at large. “If this climate rule is violating the First Amendment, it’s been all nine decades [the SEC has been] violating the First Amendment,” Georgiev said. “They will definitely try it out in courts. At the end of the day, a lot of far-fetched arguments succeed in courts.”

Correction, June 21, 2022, 11:20 am: An earlier version of this story misstated the first name of Steven Rothstein, the managing director of the Ceres Accelerator for Sustainable Capital Markets.