Volume 36

Environmental (Non)disclosure and the SEC’s Proposed Solution

by Emma R. Howard

Investment funds purporting to focus on environmental, social, and governance (ESG) factors have experienced substantial growth in recent years. This Note will focus exclusively on the ‘E’ of ESG, particularly climate-related information and disclosures. The financial sector is increasingly recognizing the importance of climate change within corporate risk management, disclosure, and investment decisions. However, the United States does not currently explicitly regulate information regarding ESG or climate-risk. Although a growing number of companies seek to address environmental considerations through voluntary reporting, this information is often inconsistent and fragmented.

While environmental disclosures have long been voluntary, there is a growing global movement of mandatory climate-related disclosures. Nearly a decade ago, the U.S. Securities and Exchange Commission (SEC) began a comprehensive effort to “modernize and simplify” the disclosure rules that apply to public companies. In that period, investor demand for the SEC to standardize how companies disclose climate-related risk and other ESG information has steadily increased. In March 2022, the SEC released its long anticipated proposed rule titled The Enhancement and Standardization of Climate-Related Disclosures for Investors (the Proposed Rule). If finalized, the Proposed Rule would put in place an information-generating framework to help capital markets and its participants respond to the climate-related economic challenges ahead.

This Note will analyze how stakeholders are responding to the Proposed Rule, whether the proposed regulations will be feasible and effective, and how The American Bar Association’s Model Rules of Professional Conduct are implicated. Part I will discuss the rapid growth of ESG in the United States, its recent politicization, and the problems associated with the current informational framework. Part II will outline the current structures and organizations impacting how companies are disclosing their climate-related information. Part III will provide an overview of the SEC Proposed Rule. Finally, Part IV will discuss prominent legal, technological, economic, political, and ethical issues implicated by the Proposed Rule.

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