Is climate risk transparency over in the US?

Is the SEC Climate Disclosure rule redundant or necessary?

Currently, companies report financially material risks under Generally Accepted Accounting Principles (GAAP), and many also provide additional voluntary disclosures through non-GAAP sustainability reports. However, these approaches are inconsistent and lack standardised methodologies for climate risk assessment. The SEC rule was designed to bridge this gap by mandating uniform, comparable, and investor-relevant climate risk disclosures.

What the SEC rule resolves that GAAP and Non-GAAP Disclosures don’t:

1. Standardisation across industries – Unlike voluntary non-GAAP disclosures, SEC-mandated reports ensure consistency and comparability across businesses, eliminating selective or misleading sustainability claims.
2. Integration of climate risk in Financial Statements – Under current GAAP, climate risks are not explicitly tied to financial statements, leading to incomplete assessments of long-term financial exposure.
3. Scope 3 emissions accountability – The SEC rule mandates Scope 3 emissions reporting, which voluntary disclosures often omit but are crucial for understanding supply chain-wide carbon footprints.
4. Investor-driven focus – The SEC disclosures ensure material climate risks are reported in a way that investors can act on, providing structured and reliable information rather than PR-driven voluntary reports.

Investor confidence at stake

A stable regulatory framework is crucial for investors who rely on standardised disclosures to assess climate-related risks and opportunities. Without clear guidance from the SEC, investment firms will struggle to compare companies' sustainability performance, leading to mispricing of climate risks in financial markets.

For ESG-focused funds, this rollback will increase scepticism about the credibility of corporate sustainability claims. If companies are no longer required to disclose emissions data or climate risks, investors will not trust voluntary disclosures alone. The risk of greenwashing will grow in an environment where regulatory oversight is weakened

The political and legal landscape under the Trump administration

The SEC’s decision to halt its climate disclosure rule is a direct response to legal and political challenges. Several Republican-led states and business groups sued the SEC, arguing that the rule overstepped its authority and imposed unnecessary costs on businesses. In response, the SEC requested a pause in legal proceedings to reassess the rule internally.

This move aligns with the deregulatory stance of the Trump administration, which is actively dismantling ESG mandates and climate-related financial regulations. The focus is shifting away from federal climate disclosures toward a more business-friendly approach that reduces regulatory burdens, particularly for industries like oil, gas, and manufacturing.

With this shift, businesses will now face a fragmented regulatory environment, where states such as California advance their own stringent climate disclosure laws while federal requirements weaken. As the SEC continues to halt all ESG-related mandates, companies will be forced to navigate a patchwork of state-level and voluntary standards, complicating compliance for multinational firms.

What’s next?

The SEC’s climate disclosure rule is currently not mandatory, but the situation remains fluid. Here’s what businesses and investors should watch for:

1. Definitive revisions: The SEC will likely adjust the rule to address legal concerns, potentially limiting its scope to large public companies or removing controversial Scope 3 emissions reporting. The rule may also be revised to narrow the reporting requirements by raising the threshold for what constitutes "material" climate risks.
2. Judicial Rulings: Courts will decide whether the SEC has the authority to mandate climate disclosures, setting a precedent for future ESG regulations in the U.S.
3. State-Level Regulations: With federal action stalled, some states (e.g., California) will push forward with their own mandatory climate disclosure laws, creating a fragmented regulatory environment.
4. Political Outcomes: The Trump administration is actively rolling back climate-related financial regulations, and businesses should prepare for further ESG deregulation at the federal level.

The bottom line

The SEC’s pause on climate disclosures is not just a temporary regulatory delay—it is a major setback for corporate sustainability in the U.S. The existing GAAP and non-GAAP disclosures are insufficient, and the SEC rule was explicitly designed to close this gap by mandating consistent, investor-relevant climate risk reporting.

By reversing course, the SEC is weakening transparency and will undermine investor trust and long-term risk assessment. Without standardised climate disclosures, companies will face greater uncertainty, and investors will struggle to make informed decisions on climate risk exposure.

In a world where sustainability performance is increasingly tied to financial performance, the smartest move for businesses is to continue enhancing their climate disclosures despite regulatory rollbacks—because the demand for transparency will not disappear.

Sources:

• Wall Street Journal: "SEC Hits Pause on Defense of Climate Disclosure Rule"
• Reuters: "US Market Watchdog Aims to Pause Lawsuit Over Climate Disclosures"
• SEC Official Documents & Announcements: SEC Website