On February 11, the acting chairman of the US Securities and Exchange Commission (SEC) published a statement requesting that the Court of Appeals pause legal hearings for its pending ‘Climate Rule’. In a move that aligns with broader shifts away from Biden-era climate policies, the SEC’s long-expected climate disclosure requirement has been criticized as “deeply flawed” and exceeding the organization’s mandate by regulating non-financial factors.
The climate rule, which would require organizations to disclose the financial impacts of climate risks if passed, faced significant opposition when originally proposed in 2023. After receiving over 24,000 comments, a scaled-back version narrowly passed in March 2024 – only to be stalled by legal challenges the next month. Now, the SEC’s decision to pause the legal hearings suggests that the rule may ultimately be abandoned. What does this mean for the market?
Largely, the impact on organizations will depend on regional regulations and investor sentiment. While the SEC’s proposed rule applied to 2,800 public firms across the US and 600 non-US organizations, California's more stringent climate disclosure rules impact over 10,000 public and private firms. Their remit is deeper as well as wider: organizations meeting certain revenue thresholds are required to report Scope 3 emissions and climate-related financial risks. Other states like New York, Illinois and Colorado have also introduced climate disclosure bills that could push the market forward. Alongside achieving regulatory compliance, US-based organizations will also need to invest resources in understanding and navigating competing views on public disclosures, with one eye on legal and reputational complexities.
Regulatory demands are not only evolving in the US. The EU’s new Omnibus proposal – which is still very much in flux – seeks to streamline the CSRD, CSDDD and EU Taxonomy, and therefore may reduce disclosure requirements for small and mid-size enterprises (SMEs). While larger firms will still be subject to the reporting requirements, the more limited scope of climate-related impacts could create blind spots for potential investors.
Against this backdrop, organizations must be aware that stakeholder demands may maintain the pressure otherwise slackened by decreasing regulatory scrutiny. Investor sentiment remains strong for asset managers to integrate climate-related risks into their investment processes. A 2024 study from Stanford Business School and MSCI revealed that 93% of investors – mostly in Europe – expect climate change to affect investment performance within the next two to five years. Many investors are aware that climate risks, not yet fully priced into asset values, could trigger market corrections. This reinforces the need for asset managers to invest in high-quality, tailored software capable of navigating the evolving global reporting landscape.
As climate disclosure regulations continue to evolve, firms and investors alike must remain agile and prepared. While the SEC's pause may signal uncertainty in the US, global momentum for climate risk management is likely to persist, underscoring the need for sophisticated tools and strategies to navigate this changing landscape.
