SEC fails to ensure transparency in corporate reporting as financial risks from climate grow

WASHINGTON, DC — Wednesday morning, the Securities and Exchange Commission (SEC) passed a rule on climate disclosure that falls significantly short of the necessary measures to address the financial risks posed by climate change. Partisan political pressure by self-serving politicians and litigation threats from corporate lobbyists caused the SEC to weaken the rule. This ruling leaves the retirement savings of millions vulnerable and fails to ensure workers’ jobs are protected through the transition.

The rule’s notable omissions, particularly the lack of requirement for companies to disclose Scope 3 emissions, present a stark deficiency. Scope 3 emissions, which account for the majority of a company’s carbon footprint through its supply chain, are critical to understanding the full extent of a corporation’s climate financial risk. The decision to allow companies to omit this information, based solely on their materiality assessment, further dilutes the rule’s efficacy. This discretion leaves investors in the dark about the true climate risks and financial implications associated with their investments.

“Chair Gensler claims the SEC dropped Scope 3 disclosures due to ‘public feedback.’ Yet, almost 18,000 members of the public demanded quick adoption of stringent standards: specific climate risk financial data and compulsory, comprehensive emissions reporting. The SEC yielded to corporate lobbying, sidelining savers worried about their financial future by opting for voluntary measures. This marks a blatant failure to act, and indicates that California and Governor Newsom need to step up with implementation of the Corporate Accountability Act” said Jackie Fielder, Co-director of Stop the Money Pipeline.

Nowhere is climate financial risk more irrefutable than in the insurance industry, where homeowners face unprecedented premiums and coverage denials. This crisis is a harbinger of the broader financial instability posed by unchecked climate risks.

“In their reports last year, State Farm and Allstate appear to have omitted any hint of possibly exiting California over wildfire dangers in reporting. Similarly, Bankers, Travelers, and AIG seem to have kept silent about the threat extreme weather and flooding in Florida pose to insurance coverage. And yet, within a year, all five insurers made massive changes to their coverage in each state and reported huge losses. Savers should back firms that act in our best interest, not those fleeing disasters they contributed to. This requires robust, compulsory climate risk disclosures—a task the SEC failed to accomplish. Companies gamble our savings on climate chaos and leave us holding the bag” said Frankie Iannuzzi, an educator who organizes with Planet over Profit.

The rule’s failure to mandate the quantification of financial impacts from both physical and transition risks related to climate change significantly undermines investors’ ability to make informed decisions. This omission is a glaring oversight in the face of an escalating climate crisis that threatens to destabilize global financial markets.

“This loophole-riddled rule is a win for Wall Street, and a loss for everyone else. Corporations could have been required to disclose their unpreparedness for climate challenges, to show us how they would transition to a clean and just economy, and fully disclose pollution. But under this rule, New Yorkers who want to protect both the planet and their retirement portfolios won’t be able to compare one company to another under a decent federal rule,” said Pete Sikora, Climate Campaigns Director of New York Communities for Change.

This weak stance on climate risk disclosure is a departure from international norms and best practices. As countries around the globe, including China and the European Union, advance their regulatory frameworks to include rigorous climate risk disclosures, the SEC’s proposed rule lags, jeopardizing the United States’ position in the global market. Furthermore, the Inflation Reduction Act’s (IRA) potential is significantly hampered by the absence of robust climate risk disclosures, which are essential for mobilizing capital towards sustainable investments.

“Retirees want to ensure their retirement savings aren’t at risk from industries that aren’t planning for the needed transition to climate solutions. This rule could have required companies to reveal their strategies for handling climate risk. Instead, the SEC chose to let companies decide what climate risks to disclose, so investors still will not have adequate information on which to make decisions for managing their retirement portfolios and investments securely,” said Deborah Moore, Campaign Strategist with Third Act.

Real-world examples abound of the financial toxicity hidden by inadequate disclosures. Diversified Energy Co.’s 20% loss in share value and Exxon and Chevron’s $6.6bn in asset write-offs underscore the urgent need for transparency in how companies are navigating the transition to a low-carbon economy. Without this transparency, the financial system remains vulnerable to the disruptive shocks of climate-related bankruptcies, reminiscent of the 2008 financial crisis but with far-reaching environmental consequences.

With the adoption of new, quantifiable, and enforceable guidelines for transition plans underway on the international stage, the United States must intensify its efforts to avoid falling behind.

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