Sydney Mann
Associate Editor
Loyola University Chicago School of Law, JD 2025
On March 6th, 2024, the Securities and Exchange Commission (SEC) adopted a series of important climate change disclosure rules for public companies and foreign private issuers. Conceived initially through a sweeping proposal drafted in 2022, the long-awaited rule imposes significant new requirements on information public companies must disclose regarding their climate risks. The Commission’s new rule will significantly impact how relevant organizations must track their environmental, social, and governance (commonly known as ‘ESG’) functionalities beginning in the year-end of 2025 to maintain compliance.
However, taking a step back, what is ESG really? Why is it important? And how is it that an independent government agency tasked with enforcing the law on our economic market is able to enforce such reporting? This article answers these questions and more in the wake of the SEC’s new ruling.
What is ESG and why it matters
ESG has been around for a while. Some sources state that ESG investing has existed for centuries with the early days focusing on religious abstention of forced labor. However, the term was originally coined in 2004 by the United Nations Global Compact to represent socially responsible investing, as a way for investors to align their portfolios with their values. Such investing practices became popularized in the 1960s and 1970s when organizations began divesting in South Africa in protest of the country’s system of apartheid. One could argue that a more recent example of ESG investing is when many organizations publicly announced that they were voluntarily curtailing operations in Russia given the country’s invasion of Ukraine.
Under the ‘enviornment’ component, organizations report on the greenhouse gasses, water, and ground pollution emissions that they produce. Companies can also report on positive sustainability impacts they have. Under the ‘social’ component, organizations provide figures on how they manage their employee development and labor practices, liabilities on the safety and quality of their products, as well as supply chain health and safety standards. Finally, the ‘governance’ component represents reporting on what rights shareholders have, board diversity, and executive compensation.
ESG matters because through value-based investments and reporting on environmental, social, and governance areas of an organization, both business and society benefits. In a 2020 study published by the Harvard Law School Forum on Corporate Governance, researchers found that higher ESG performance can be liked to higher profitability for organizations. Not only that, but required disclosures mandated by governing bodies such as the United States Securities and Exchange Commission allow for individuals who invest to be fully aware of the impact said company has on climate change, risks their workforces face when producing their products, and how they manage themselves overall allowing investors to make more informed decisions about what organizations to put their funds towards.
How the SEC enforces its authority and summarizing the new climate disclosure rule decided on March 6th
The SEC is an independent federal agency (meaning it is not tied to one of the three branches of government – executive, legislative, or judicial) established by the Securities Exchange Act of 1934. The agency’s leadership consist of a five-member Commission appointed by the President and confirmed by the Senate. One of the main responsibilities of the SEC is to oversee annual trading of approximately $118 trillion in U.S. equity markets, $2.8 trillion in exchange-traded equity option, and $237 trillion in the fixed income markets. Stated differently, the SEC is the government agency responsible for regulating the securities market and protecting investors. Therefore, it is consistent that they have the power to require any publicly traded company to comply with ESG disclosures, standardizing climate-related disclosures by public companies and public offerings.
On March 6th, the SEC issued a final rule with new requirements for public organizations to provide climate-related disclosures in their annual reports and registration statements for initial public offerings (IPOs, meaning organizations that want to be traded on the public market). As highlighted by Jones Day, the final rule requires public companies to state the following: (1) climate-related risks and related risk management and oversight; (2) Material Scope 1 and Scope 2 emissions (for large accelerated filers and accelerated filers only); (3) financial statements disclosure describing capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events; (4) financial statement disclosure describing if carbon offsets and renewable energy credits or certificates have been used as a material component of the company’s plans to achieve its climate-related goals; and finally (5) carbon-reduction goals.
Although a more limited ruling than initially proposed, the SEC’s recent decision marks a major milestone for companies to provide sustainability-related reporting. In doing so, not only will investors be better informed about the companies they are backing, but society will have the data to understand the full impact that public organizations have on the world around us.