The real impact of the new US climate disclosure regulation

Our consultant, James Aggas , shares his insights on the significant opportunities he sees presented by the SEC regulations.

Over the last three years, the tightening grip of ESG reporting regulations worldwide has sparked a spectrum of reactions, ranging from fervent advocacy to sceptical criticism. Fuelling these discussions has been the emergence of several thorough regulatory frameworks, such as the EU's Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), standards set by the International Sustainability Standards Board (ISSB) and the Task Force on Climate-related Financial Disclosures (TCFD), as well as additional reporting requirements from rating agencies.

Within the United States, this debate has crystallised around the Securities and Exchange Commission’s (SEC) proposed climate-related disclosure requirements. Currently, in a ‘stay order’, these rules have ignited a fierce battleground of contention and extensive public dialogue. They have sparked specific criticism from two opposing camps - Republican-led states versus environmentalists like the Sierra Club and the Natural Resources Defense Council – while the broader concern of most stakeholders revolves around the burden of regulatory overload. The SEC rules represent the introduction of yet another analogous reporting framework, akin to existing regulations in Europe and the UK, which will further compound the already significant reporting and disclosure obligations and compliance costs on US multinational companies.

Hence, a critical question remains around the struggle to balance regulatory impacts with the urgent need for accountability: Given that large US multinationals already adhere to stringent climate reporting mandates from the EU, UK, and even states like California, are the new SEC regulations redundant?

US multinationals and global ESG mandates

First, it is crucial to understand that major US multinationals often operate globally, exposing them to various international regulations. The EU's CSRD, the UK's alignment with TCFD, and other frameworks like the ISSB set substantial climate reporting requirements for these corporations. Importantly, these standards are not just tick-box exercises; they require deep integration of sustainability and climate change into business operations, supported by verifiable data and adherence to stringent guidelines.

Therefore, the SEC rules will become another requirement, on top of European or UK regulations, for certain publicly traded companies in the US to integrate into their climate reporting practices. The rules will mandate companies to disclose their greenhouse gas emissions, detail what they are doing to mitigate the risks of climate change and be transparent about how they are governed. And, with the earliest enforcement date looking like 2025, the additional requirements could soon be upon US multinationals.

The key contention is that, in one form or another, all of the requirements within the proposed SEC regulation are covered by at least one of the CSRD, TCFD and ISSB. This indicates that, whether eventually enforced or not, the SEC rules are unlikely to affect the completeness, accuracy and granularity of climate reporting by a multinational US business because the international nature of their regulatory compliance compels them toward transparency and accountability either way.

The role of publicly listed US firms governed exclusively by the SEC rules

The narrative takes a distinct turn for smaller publicly listed companies in the United States, who find themselves only within the scope of the SEC's regulations. These companies either do not operate in other nations that mandate ESG reporting or fail to meet the criteria required for such international legislation. For example, a US-based business would not be required to report against the EU’s CSRD unless it has a net turnover of more than €150 million in the EU and if it had at least one subsidiary or branch that is a large entity located within the EU.

While multinationals have long been subject to various international climate reporting mandates, for many smaller and predominantly domestic publicly listed US businesses, the SEC regulations would represent their initial foray into formal climate reporting. Even if smaller than their global counterparts, these companies can have a substantial aggregate impact. For context, there could be up to 3,000 businesses in the US that will be facing climate reporting requirements for the first time through the SEC rules. Therefore, the onset of the SEC’s reporting requirements would enable these businesses, no matter the size, to better access capital, improve their stakeholder perceptions, enhance their ESG ratings, and better govern and manage climate risks and opportunities.

If the rules instil accountability around climate impact in these businesses, then the SEC has an opportunity to distinguish itself within the global landscape of ESG legislation and carve out a distinct and critical role in promoting environmental transparency and accountability amongst smaller to mid-sized publicly listed businesses beyond trying to influence multinationals.

Is the SEC’s role redundant, then?

If other reporting regulations already cover the big players, does additional oversight by the SEC matter? Absolutely. The SEC's requirements should enhance, localise, and specify ESG reporting needs for the US market. While international standards might already cover large multinationals, the SEC rules play a crucial role in bringing smaller US-based publicly listed companies into the fold of climate reporting. Being the world's largest financial market, the US holds significant capacity for investment in the climate transition, making it crucial to ensure a wide range of businesses (regardless of their size) are being transparent and providing easily accessible information for investors to analyse effectively and benchmark environmental performance.

Moreover, while contentious, the SEC's actions send a promising signal about the United States' commitment to sustainability. By insisting on clear, comparable, and accessible climate-related information for investors and the public, the SEC is not only aligning financial markets with broader societal expectations but also influencing expectations regarding corporate behaviour and business appetite towards environmental action.

The debate over the necessity of the SEC’s climate-related disclosure requirements does not stand in isolation but is a piece of a larger puzzle of global sustainability efforts. While US multinationals might already face strict foreign regulations, the SEC rules ensure comprehensive coverage across all national enterprises, encouraging smaller companies to amplify their sustainability efforts and collectively inspire impact.

In essence, every piece of legislation, whether perceived as strong or weak, incremental or transformative, contributes to the overarching goal of global sustainability. Thus, dismissing the SEC’s rules as unnecessary overlooks the broader impact of these regulations in fostering a resilient, sustainable, and equitable corporate landscape across the scale spectrum. As we advance, the synergy between these domestic and international elements of ESG reporting frameworks will be pivotal in driving forward the sustainability agenda.