Laws Like SEC Climate Reporting Rules Already Happening in the EU

The Securities and Exchange Commission’s climate change disclosure rules announced last month have garnered pushback from anti-ESG groups, and a lawsuit resulting from the new rules is now headed to the US Court of Appeals for the Fifth Circuit.

The new SEC rules require that climate-related disclosures are assured. Although there are different levels of assurance, information will need to be auditable—which means companies must have a strong internal control system around that data.

Ultimately, the lawsuit that’s causing the SEC rules to pause will only delay the inevitable. The demand for climate-related disclosures is already here. The most successful and viable companies will recognize this is an opportunity and capitalize on it.

The rules aren’t climate disclosures for the sake of monitoring emissions; they’re about providing critical information that enables investors to determine 21st-century business risks and long-term value.

Capital markets outside the US are already required to disclose information on climate-related issues. For example, EU law already requires all large and listed companies to disclose what they see as risks and opportunities that arise from social and environmental issues, along with the impact of their own activities on people and the environment, as part of European Green Deal.

And investors are demanding this information, so these new rules shouldn’t come as a surprise. In some cases, the rules are even more extensive than what the SEC has proffered.

The EU’s significantly more robust reporting standards already encompass the new SEC requirements. Public companies with subsidiaries abroad that will be required to comply with SEC’s new rules are already disclosing more information to meet the EU standard.

Even in US states such as California already request more intense climate-related disclosures. Gov. Gavin Newsom in October signed bills requiring large companies doing business in California to disclose greenhouse gas emissions and measure and disclose the risk climate change poses to their business.

To raise capital, many private companies will follow SEC regulations proactively because potential investors want this information. In 2022, more than 12,000 current and prospective investors submitted comments calling for the SEC to update its requirements on climate-related disclosures. A 2023 survey published by Oxford University also found that 79% of institutional investors consider climate risk disclosure to be at least as important as financial disclosure, while almost one-third consider it more important.

Transparency around a business’s environmental impact is an important factor, specifically among younger generations. A 2021 Pew Research poll found that most members of Generation Z and millennials agree that tackling climate change should be a top priority for businesses.

Many companies that one day want to be public will likely already have years of data reported to the new SEC standard or even beyond it due to the preexisting requirements they are already likely operating under. And if these much smaller companies can gather, analyze, and report this information, it isn’t a significant ask of organizations hundreds of times their size with thousands more employees and resources for outside support.

The added “burden” for these larger corporations isn’t as significant as it’s being played out to be, and most companies are already bearing it, as many either operate under the requirements of the EU or in a specific state with its own expectations on climate disclosures. These new requirements just complete basic accounting standards for the modern business world.

In accounting, there is the old age concept of “going concern,” which refers to the required assessment for a company to receive a “clean bill of health” from its auditors. Simply put, the business entity is expected to continue running its operations in the foreseeable future and won’t be forced to discontinue operations for any reason.

If today’s companies don’t disclose climate related information, it can’t be determined whether the company is viable. That’s because if a company doesn’t assess, manage, and report on climate-related issues, the appropriate determination regarding going concern simply can’t be made.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Barbara Porco is a clinical professor and associate dean of graduate studies at Fordham University Gabelli School of Business.

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