SEC Pumps The Brakes On Climate Disclosure Rule: What Does This Mean For The Market?
SEC Pumps The Brakes On Climate Disclosure Rule: What Does This Mean For The Market?
In mid-February, US Securities and Exchange Commission (SEC) requested that the Court of Appeals pause legal hearings for the ‘Climate Rule’, which would require organizations to disclose the financial impacts of climate risks, including Scope 1 and Scope 2 emissions. The SEC’s Acting Chairman criticized the rule as “deeply flawed”, arguing that regulating non-financial factors exceeds the SEC's mandate. This decision aligns with broader political shifts, including efforts under President Trump to dismantle Biden-era climate policies.
When proposed in 2023, the climate rule faced significant opposition, receiving over 24,000 comments. A scaled-back version narrowly passed in March 2024, but legal challenges led to the rule being stayed in April. The SEC’s decision to pause the legal hearings suggests that the rule may ultimately be abandoned. But what does this mean for the market?
The impact will depend on regional regulations and investor sentiment. The SEC’s climate rule proposal applied to 2,800 public firms across the US and 600 non-US organizations. Meanwhile, California's more stringent climate disclosure rules impact over 10,000 firms (including private firms), requiring them to report Scope 3 emissions and climate-related financial risks if they meet certain revenue thresholds. Other states like New York, Illinois and Colorado have also introduced climate disclosure bills that could push the market forward. Organizations in the US will need to navigate competing views on public disclosures, potentially preparing for regulatory or legal action.
For context, the US was never the leader in climate-related financial disclosures. Most advancements have originated in Europe, followed by Asia. According to our Market Size And Forecast: Climate Risk Software 2023-2029 (Global) report, global demand for climate risk software is expected to nearly double, from $553 million in 2023 to $1.16 billion in 2029, with growth driven primarily by Europe and Asia, followed by North America. However, this growth may not be as smooth or linear as previously hoped. 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.
Despite these developments, 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.
