SEC: Step up on Climate Change

Daniel Reich

Originally published July 10, 2022 in The Hill

It is no secret that time is running out to address climate change. The Earth is now warmer than any time since before the last ice age. Children born this year could live to see parts of the Eastern seaboard swallowed by the ocean and, by the end of this century, climate change could be the cause of 4.6 million excess deaths each year.

Despite this urgent challenge, last week the Supreme Court gutted the Environmental Protection Agency’s (EPA) capacity to mitigate climate change. Justice Elena Kagan said it bluntly, “Today the Court strips the Environmental Protection Agency of the power Congress gave it to respond to ‘the most pressing challenge of our time.’” In a gridlocked Congress, there are not enough votes to enact meaningful legislation to address climate change, such as a carbon tax. And Biden’s climate plan to promote electric vehicles is being eviscerated by the Senate.

Rather than despair, it’s time to get “creative” on climate, says Gina McCarthy, President Biden’s national climate adviser and former EPA administrator during the Obama administration.

Here’s a creative—and underutilized—strategy. The federal Securities and Exchange Commission (SEC) can shift investment away from fossil fuels, while protecting investors and stockholders, by requiring publicly traded corporations to disclose their impact on (and vulnerability to) climate change.

In fact, SEC’s Regulation S-K, was clarified in 2010 to emphasize that climate disclosures are required. According to CERES, a nonprofit that evaluates climate disclosures, “nearly half of the 600 largest U.S. companies…still do not provide decision-useful disclosures on climate-related risks. Those that do often provide disclosures that are merely boilerplate or too brief, and effectively meaningless.” Worse, the SEC has taken zero enforcement actions to comply with the 2010 clarification of Regulation S-K.

The result is that businesses shortchange investors and the public by “green washing”—providing glowing reports of their activities that are not supported by their business practices.

Encouragingly, the SEC recently proposed a new, more expansive rule to require climate disclosures. But the proposed rule has extended compliance dates for the most basic information. This means that—assuming the SEC decides to enforce the proposed rule—it would take effect in three years, at the earliest.

In other words, the SEC is acting too late to assist in the current Biden climate agenda. If the next president is hostile to climate action, or if future leadership of the SEC is unwilling to enforce climate-related regulations, the expanded rule will be a fruitless gesture.

That’s why the SEC must act now. It can start with enforcement of the rule already on the books. There is strong legal authority and an existing regulatory framework for this approach. Further, there is a private bar willing to file shareholder suits if inaccurate or misleading information is disclosed.

In addition, the SEC can move up its compliance schedule for its proposed regulation. This will not be an unfair surprise to corporations, as they have been on notice for at least 12 years since the 2010 regulation was issued. And there’s more the SEC can do, as outlined in a detailed action plan submitted to the SEC by the Environmental Protection Network.

Policymakers and the courts can argue over whether Congress or federal agencies should take the lead on climate action. But it’s hard to argue that investors should be kept in the dark on climate impacts. That’s why the SEC must step up, before it’s too late.