The US Securities and Exchange Commission (SEC) has decided to pause litigation defendingits climate disclosure rule, citing the need for further review of its authority to enforce such regulations. The rule, originally approved in March 2024 under the Biden administration, was designed to enhance climate-related disclosures by requiring public companies to report material climate-related risks, including greenhouse gas (GHG) emissions and their potential financial impacts. However, the final requirements were adjusted before implementation and have been delayed pending further legal and regulatory assessment.
Background on the SEC climate disclosure rule
Acting SEC Chairman Mark Uyeda, who assumed his role following President Trump’s inauguration, has in the past expressed concerns about the rule’s scope and impact on financial reporting. The rule is being challenged in court, and the SEC under its former Chairman Gary Gensler had maintained the rule pending the outcome of its legal defence of it. Mr Uyeda however has now directed SEC staff to request that the US Eighth Circuit Court of Appeals suspend hearings on the case to allow time for a comprehensive analysis of the Commission’s position.
In a statement, Uyeda stresses that the legal defences put forward in the name of the SEC do not reflect his views, saying “The briefs defend the Commission’s adoption of the Rule, but I continue to question the statutory authority of the Commission to adopt the Rule, the need for the Rule, and the evaluation of costs and benefits. I also question whether the agency followed the proper procedures under the Administrative Procedure Act to adopt the Rule.
He also highlights his view that any regulatory measures should align with existing financial statement disclosure requirements and provide clear guidance for companies, particularly regarding financial estimates and assumptions related to climate-related risks, including greenhouse gas emissions. The now-expected withdrawal of the rule will leave businesses to navigate the complexities of their own climate-related disclosures without a standardized framework.
Original intentions of the SEC climate disclosure rules
In its original form, the SEC climate disclosure rule was expected to create more structured reporting around physical risks, transition risks, and material impacts stemming from climate change, particularly focusing on GHG emissions. The SEC’s aim was to provide clarity for companies on how to disclose their emissions, the financial implications of these emissions, and any strategies they might employ to mitigate climate-related risks. This included the use of carbon offsets, renewable energy credits, and other mechanisms that could support them in meeting their environmental targets. The intention was to ensure that investors would have access to the necessary data to assess risks posed by climate change to businesses.
However, questions over the SEC’s authority, and the potential financial burden on businesses led to legal challenges, with the rule now expected to be formally withdrawn.
Legal and regulatory implications for US businesses
With the SEC reassessing its approach, public companies, including large accelerated filers, are now in a period of uncertainty regarding climate-related disclosures. While businesses are still expected to disclose material impacts that could affect their operations or financial condition, a withdrawal of the rule will leave less clarity on how climate-related risks should be reported in registration statements, annual reports, and other financial filings.
As companies continue to face increasing pressure from investors, customers, and other stakeholders, they must find ways to provide transparency about their carbon footprints, and related climate risks, despite the lack of regulatory guidelines.
Changes to audited financial statements
For emerging growth companies, foreign private issuers, and smaller reporting companies, the withdrawal may reduce the immediate burden of compliance costs associated with updating audited financial statements and implementing new climate-related disclosure frameworks.
Impact on investor expectations
However, investors focused on climate-related targets, sustainability efforts, and financial assumptions may now have fewer standardized disclosures to rely on when assessing corporate strategies for managing climate-related risks. Without clear rules, companies may have to rely more heavily on voluntary disclosures to demonstrate their commitment to sustainability.
Beyond regulatory uncertainty: How businesses should adapt
Beyond the direct regulatory implications, businesses must also consider how climate disclosure requirements relate to their overall disclosure controls and procedures. Many companies already include voluntary sustainability disclosures in periodic reports, but the absence of mandatory guidelines could lead to inconsistencies in reporting practices. Without clear regulatory expectations, companies must balance transparency with the need to protect proprietary financial data, ensuring that any climate-related disclosures align with consolidated financial statements and broader corporate reporting frameworks.
Why sustainability and carbon management remain critical
Despite the now-expected withdrawal of the rule, sustainability and carbon management remain significant contributing factors to corporate success. Investor pressure, consumer expectations, and corporate risk management all play essential roles in determining how businesses should address climate risks moving forward.
Investor pressure
Institutional investors, including BlackRock and Vanguard, increasingly consider ESG criteria when making sustainable investment decisions. Climate-related information, especially regarding GHG emissions, has become a fundamental part of responsible investing, as investors look for comprehensive analysis of a company’s climate-related targets, scenario analysis, and risk management processes. Many investors are particularly interested in how companies plan to reduce their GHG emissions and what steps they are taking to manage their environmental impact.
Without standardized disclosures, companies must find alternative ways to demonstrate their commitment to sustainable practices in their financial estimates and recent annual reports. For example, some companies may choose to disclose their carbon offsets or renewable energy purchases to demonstrate their efforts to neutralize their carbon footprint.
The impact on financing options
In addition to direct investment strategies, many financial institutions are integrating climate-related risk assessments into their lending and underwriting processes. GHG emissions and climate-related targets are increasingly becoming a material component of creditworthiness, influencing the terms and conditions under which companies are able to access financing.
This means that even without SEC-mandated disclosures, companies that fail to provide adequate climate-related disclosures may face challenges in securing financing. The ability to demonstrate proactive sustainability efforts can therefore materially affect a company’s access to capital markets, as investors look to balance the environmental risks inherent in businesses’ GHG emissions and other sustainability metrics.
Consumer expectations
More than 70% of US consumers are willing to pay a premium for sustainable products and services. As public awareness of climate change grows, businesses that fail to address material climate-related risks—such as GHG emissions—may risk losing customer trust and market share. This is particularly important as severe weather events and other natural disruptions become more frequent and severe, directly affecting supply chains and business operations.
Climate-related risks and resilience
Ignoring climate risks can lead to higher costs, supply chain disruptions, and increased vulnerability to severe weather events and other natural occurrences. Businesses must incorporate climate-related financial disclosures into their strategic planning to safeguard against unpredictable material impacts. These climate-related risks, such as GHG emissions regulations or the physical impacts of severe weather events, must be taken into account as part of a company’s overall risk management strategy.
By integrating ESG strategies into their operations, companies can improve resilience, protect financial estimates, and mitigate the financial statement disclosure requirements associated with climate change.
Transition risks
Transition risks, such as shifts in regulatory requirements, evolving market expectations, and technological advancements, also play a crucial role in long-term corporate resilience. Companies that fail to adapt to a low-carbon economy may face increased operational costs, reduced competitiveness, and potential reputational risks. Proactive businesses, on the other hand, can leverage sustainability as a differentiator, positioning themselves as industry leaders in an evolving global market. In recent research by Sweep and Capgemini, more than half of US businesses reported seeing opportunities within their sustainability programs for cost optimization (52%) and launching new products / services (52%)
The standardization of climate-related disclosures
While a withdrawal of the SEC climate rule will create uncertainty in the US, international standards continue to emphasize the importance of consistent reporting, particularly regarding Scope 2 GHG emissions, supply chain emissions, and transition risks.
The introduction of the IFRS Sustainability Disclosure Standards further underscores the growing expectation for companies to provide transparent, comparable climate-related financial data.
As businesses operate across multiple jurisdictions, aligning with global disclosure frameworks will be critical in maintaining their competitiveness and ensuring compliance with international reporting requirements.
The role of ESG platforms in corporate sustainability
With the regulatory landscape in flux, many businesses are turning to ESG platforms to streamline their sustainability efforts and ensure alignment with investor expectations. ESG reporting tools can help companies track and manage key climate-related data, such as carbon emissions, energy efficiency metrics, and material impacts on operations.
Using ESG platforms for better compliance
These platforms also support companies in integrating climate-related disclosures into their consolidated financial statements and periodic reports. By leveraging ESG platforms, businesses can enhance their disclosure controls and procedures, ensuring that climate reporting is both accurate and strategically aligned with their broader financial reporting.
Scenario analysis and climate risk management
Additionally, ESG platforms facilitate scenario analysis, allowing companies to assess potential financial impacts under different climate-related scenarios, including severe weather events or regulatory changes related to GHG emissions. This enables businesses to develop data-driven strategies for achieving climate-related targets and managing transition risks more effectively.
As investor demand for transparency continues to grow, ESG platforms provide an essential bridge between corporate sustainability initiatives and financial reporting requirements. While the SEC’s final rules remain in question, businesses that invest in robust ESG frameworks will be better equipped to navigate the evolving regulatory landscape and demonstrate their long-term commitment to sustainable growth.
Looking ahead: Navigating uncertainty in climate disclosures
Although the SEC is casting serious doubt over the future of its own climate disclosure rules, businesses must continue to address climate-related risks as part of their long-term strategy. Financial statement disclosure requirements still mandate the inclusion of any material expenditures incurred due to climate change, and investors remain focused on related disclosures for investors. This includes any steps taken to manage GHG emissions, including purchases of carbon offsets or renewable energy credits.
As pending legal challenges unfold, companies should prioritize voluntary climate disclosures, ensuring they provide a material scope of information that aligns with investor expectations and regulatory trends. Climate risks will continue to be a significant contributing factor in corporate decision-making, regardless of regulatory shifts.
Companies that take a proactive approach to climate-related targets, data management and scenario analysis will be better positioned to navigate an evolving financial and regulatory landscape.
