Getting (Dis)closure: U.S. Regulatory Changes Leading to Climate-Related Financial Disclosures

Businesses and financial institutions have begun responding to public pressure to do more on climate change. Investors have been increasingly calling for more action on sustainability, concerned not only about the urgency of climate change, but also about the impacts of climate change on their chosen firms and the imperative for adapting to the long-term, low-carbon economy.

One of the best ways for investors to monitor businesses and financial institutions’ strategies for addressing climate risks and to prevent the misallocation of capital is through government-regulated climate-related disclosures—requiring publicly listed companies and financial institutions to divulge information on their climate change policies and greenhouse gas (GHG) emissions throughout their value chains. The idea is that with this information, investors can better understand the risks of putting money into a chosen investment vehicle or asset class, which, under proper market forces, should influence the decisions of some of the world’s movers and shakers to take more climate action today.

Governments on the other side of the Atlantic have been leading the campaign for more transparency over the past half decade. But President Biden and the Securities and Exchange Commission (SEC), headed by Chairman Gary Gensler, are not far behind. Within this year and next, Western economies—in line with pledges made during last year’s G7 meeting in London—should be equipping national financial regulators with the sticks needed to get firms moving. The goal, ultimately, is to universally adopt the G7-endorsed Task Force on Climate-related Financial Disclosures (TCFD) framework, which will ensure an even application of disclosure requirements.

Q1: What are the climate-related risks that would impact firms in the medium to long term?

A1: There are two types of climate-related risks firms face: physical risks and transition risks. Physical risks are anything from damage to physical infrastructure and increased insurance premiums to supply chain disruptions and input scarcities including energy pricing volatility. Physical risks are driven by both acute risks, such as hurricanes, and chronic risks, meaning longer-term shifts in climate patterns such as sea-level rise.

The other type, transition risks, is what firms face as they adapt to the low-carbon economy, either by market changes or government policies. Demand for certain carbon-intensive products and services may decrease as consumers make more environmentally conscious choices, for example, switching to an electric vehicle. Similarly, public perception of firms has the power to mobilize consumer and talent support or opposition, a kind of sorting hat for firms that either “get with the program” and advance climate change goals or stymie progress. Firms too should expect to face policy changes from national and, in some cases, regional governments, such as GHG pricing schemes and emissions reporting obligations.

Q2: What is the state of play for sustainable financial disclosure rules in U.S. partner countries?


European Union

The European Union has addressed climate-related disclosures throughout its organizational bodies, though the effectiveness of these initiatives has been limited. In 2017, the European Commission implemented the Non-Financial Reporting Directive (NFRD), known as “the directive,” to get listed companies, banks, insurance companies, and other public-interest entities with over 500 employees to divulge information on environmental risks. But the directive did not produce the results the commission sought—firms often fell short of formulating their resilience strategies or simply cherry-picked their most favorable initiatives.

The commission went further in March 2021 when the Regulation on Sustainability‐Related Disclosures in the Financial Services Sector (SFDR) went into effect to target financial service institutions and extract environmental, social, and governance (ESG) information, with the aim of inspiring behavioral change. But confusion over reporting requirements abounded, leading to the European Banking Authority’s (EBA) presentation of a slate of mandatory reporting requirements for banks this year aimed at cracking down on persistent cherry-picking and exaggerated language.

United Kingdom

On April 6, 2022, the United Kingdom will become the first G20 country to implement climate-related financial disclosure requirements, based on the TCFD framework. The rules will apply to the United Kingdom’s biggest publicly traded companies, banks and issuers, and private entities with over 500 employees and £500 million in turnover. UK climate change minister Greg Hands believes that enshrining the TCFD framework will help London meet its net-zero commitments by 2050 and send a signal to other developed nations to either adopt the same framework or expedite adoption of their own versions.

Q3: Does the SEC have plans to change ESG measures?

A3: The SEC’s main weapon in its arsenal to implement President Biden’s climate change agenda is to change ESG measures through aggressively enforcing mandatory climate-related financial disclosures. To shepherd this effort, the SEC created a senior policy advisor within the Division of Corporation Finance. It also created a Climate and ESG Task Force in the Division of Enforcement and initiated a 90-day public input period asking for advice on best practices in March 2021. The SEC received around 550 unique letters from financial organizations, trade groups, and nongovernmental organizations, 75 percent of which supported mandatory climate disclosure rules. 

In June 2021, the SEC announced its annual regulatory agenda, which included plans for rule amendments to climate risk disclosures. It was a much-needed update to its 2010 Commission Guidance Regarding Disclosure Related to Climate Change, which, according to the Government Accountability Office (GAO), had very little impact. The GAO found that the SEC issued just 14 comment letters on climate-related disclosures out of over 41,000 from January 1, 2014, to August 11, 2017. Already, in September 2021, the SEC announced that it had sent dozens of letters to publicly traded companies asking to make more information available to investors on the risks climate change poses to those companies.

SEC chair Gary Gensler had originally planned to publish a draft for mandatory climate-related disclosures by October 2021 but now hopes to issue one in early 2022. Staff continue to work on the measure, but difficulties in how firms disclose Scope 1, 2, and 3 emissions remain. Disclosing the Scope 3 emissions, for example, would require firms to report the carbon dumped across their entire value chains, a truly mammoth task for which no agreed-upon methodology currently exists.

Q4: What models should the U.S. government use to craft regulations?

A4: Arguably the best model the U.S. government can use is the TCFD framework, backed by the G7 and Biden’s treasury secretary Janet Yellen, who has extolled the framework for being “important work to improve the information that financial institutions and investors have when they decide how to allocate capital.” More importantly, the various firms to which climate-related financial disclosure regulations will apply responded in support of this specific framework to the SEC’s solicitation for input last year. Over 2,000 organizations, including 904 financial firms overseeing $178 trillion in assets, responded.

In 2017, at the behest of the G20, the TCFD finalized recommendations for firms globally to disclose “clear, comparable and consistent information about the risks and opportunities presented by climate change,” with the aims of creating more resilient markets over the medium and long term for a smoother transition to the low-carbon economy and hedging against price adjustments shocks. It put forth recommendations for disclosures in four areas: governance, strategy, risk management, and metrics and targets.

Recommendations in these areas include such measures as describing a firm’s boardroom oversight of climate-related risks and reporting the firm’s resilience strategy in dealing with the various climate-related scenarios, all the way up to 2°C warming and higher.

Some countries are moving to enact the framework in national law, including the United Kingdom, New Zealand, and Switzerland. The United States could look to the results of the United Kingdom’s implementation this April. As the sixth-largest economy in the world, the United Kingdom will be an effective testing ground for TCFD recommendations, although it may take a year or so to see results.

Q5: What incentives do financial disclosures provide?

A5: While climate-related financial disclosures may pose reputational risks to firms, they also provide opportunities for big gains. This is because disclosing climate risks forces firms to restructure their corporate strategies to meet emissions targets, while at the same time responding to shareholder demands for more action on ESG. TCFD suggests that firms can save on operating costs by increasing resource efficiency, including energy efficiency from transitioning to renewables; boosting competitiveness by creating low-emission products and services to meet shifting consumer and producer preferences; seeking new green markets; qualifying for government funding; and overall, demonstrating resilience in a changing world.

There is no question that investors of all stripes are demanding more action on climate change from the firms they entrust with their money. And activism has proved to work—the Harvard Business Review found that shareholder activism increases firms’ voluntary disclosures on climate change risks to the tune of 4.6 percent on average, leading to an increase in stock prices by about 1.21 percent.

In some cases, shareholder activism has triumphed in reshuffling the boards of some of the major emitters. For instance, the ExxonMobil board of directors had a rude awakening last June when Engine No. 1—an activist and impact investing hedge fund—landed three climate-forward board members on the oil supermajor’s 12-seat board with the support of shareholder votes.

But perhaps where the push to increase climate-related disclosures matters most is at the helm of the world’s largest institutional investors, which hold an outsized chunk of global capital and have the power to redirect capital flows toward the low-carbon transition and emerging technologies. BlackRock CEO Larry Fink, who effectively controls $9 trillion in assets, has played an active role in sounding alarm bells on climate change and using his firm’s financial heft to get firms on board with climate change. In this year’s annual letter to shareholders, Fink identified transparency as a key driver of long-term returns and endorsed TCFD’s disclosure guidelines. Following Fink’s lead, several banks such as Citi, Goldman Sachs, and JPMorgan Chase have designed new investment targets for the low-carbon economy, demonstrating the distinct domino effect fund managers have over the financial industry.

Emily Benson is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Zach Simon is an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2022 by the Center for Strategic and International Studies. All rights reserved.

Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business

Zach Simon

Intern, Scholl Chair in International Business