The SEC’s climate rule pause: What happens next?
The legal delay could offer companies an opportunity to leapfrog competitors on ESG and reap first-mover rewards.
Estimated read time: 3-4 minutes
Just a month after releasing its much-anticipated new rules on climate reporting, the Securities and Exchange Commission (SEC) has now paused the implementation after being sued by 25 states and other entities.
So does this mean “meeting adjourned” for company environmental, social, and governance (ESG) teams that had already started prepping for the final rule?
That’s not how many leading companies are approaching it. They see the pause as an opportunity to gain a competitive advantage by prioritizing ESG now—and reaping the benefits of doing so sooner.
Even if the new reporting requirements ultimately get killed (unlikely, though they could get watered down), key stakeholders like customers and investors are demanding transparency on all things ESG, including climate. In fact, the KPMG 2024 ESG Organization Survey found that 93 percent of companies plan on increasing ESG spending over the next three years.
As the legal hurdles sort out, what’s the best card to play? KMPG has been tracking the proposed rules since March 2022, surveying corporate leaders and regulators throughout the protracted process of getting to a final vote. Here’s what you need to know now—and how to prepare for what comes next.
The pause, explained
In March 2024, the SEC approved final rules that necessitate the disclosure of climate-related information in registration statements and periodic reports. For investors, it was a win. They see the regulations as a significant step toward enhancing transparency and accountability, particularly as climate-related risks are increasingly impacting company performance. Many corporate leaders, however, see the requirements as a burden, requiring additional compliance and legal resources at significant new expense.
The states and entities trying to block the enforcement of the rules argue they’re an overreach of SEC authority. The Fifth Circuit granted an administrative stay, halting implementation temporarily.1
The battle lines are drawn as both sides now head to court—which is precisely the wrong way to look at the issue, according to KMPG specialists who’ve been following the proposed rule changes since the beginning.
This is not just a compliance exercise, but a unique opportunity to unlock value with investors, customers, and employees,” says Rob Fisher, Sustainability leader for KPMG in the US. “The SEC’s ruling raises the bar across businesses, demanding deeper ESG engagement to gain that edge."
Rob Fisher
KPMG US Sustainability Leader
While the SEC’s stay pauses the need for calculating the impact of certain climate-related events or conditions on the financial statements, the remaining provisions of the rule are required for other reporting regimes,” adds Maura Hodge, Audit Sustainability leader for KPMG in the US. “Therefore, companies should continue to move forward according to plan and carry out an interoperability analysis."
Maura Hodge
KPMG Sustainability Reporting Leader, KPMG US
KMPG experts specialists also caution that the consequences of the legal case may not be as dramatic as they seem. Investors are already demanding additional climate-related information from companies, and 90 percent of Russell 1000 organizations already provide some form of climate disclosures in their filings. Nonetheless, if upheld, the new rules will undoubtedly change the nature of registrants’ reporting requirements.
What’s in the rules anyway?
The cornerstone of the new rules is the requirement for registrants to disclose climate-related risks that materially impact their strategy and outlook. This mandate aims to provide investors with comprehensive insights into the potential risks posed by climate change, enabling them to make more informed investment decisions. By forcing companies to confront and disclose these risks, the SEC seeks to foster greater transparency and accountability in the financial markets.
Other key components include:
Detailing how climate-related risks affect a company’s business model and financial outlook, including information on mitigation activities and transition plans aimed at effectively managing risks
Stringent disclosure requirements for greenhouse gas emissions
Governance disclosures on board oversight of climate-related risks, which specifically task boards with providing transparency regarding their role in addressing these risks
Disclosures about the impacts of severe weather events and other climate conditions on company financial statements.
Where do you go from here?
As the legal battle unfolds, companies must navigate the lingering uncertainty. The outcome of the case will have far-reaching implications for regulatory power and disclosure requirements. Despite the challenges posed by the still-pending legal ramifications, companies must proactively prepare for potential compliance with the new rules. Early preparation can mitigate risks and demonstrate a commitment to transparency and sustainability.
Moreover, embracing these rules can confer long-term benefits for companies. By adhering to stringent disclosure requirements, companies can enhance investor trust and bolster their reputation for transparency and accountability. In an era marked by growing concerns over climate change and environmental sustainability, companies that embrace these rules position themselves as leaders in ESG reporting, thereby gaining a competitive edge in the marketplace.
Footnote:
- Andrew Ramonas, “SEC Freezes Climate Rules After Challengers Pushed for Pause,” Bloomberg Law, April 4, 2024
Explore more insights and opportunities:
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SEC stays its climate rule pending judicial review
No change in SEC’s position regarding its authority; no effect on companies preparing for compliance with other rules.
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