Blog | 21 Mar 2024

SEC climate disclosure rules will help investors understand their climate risks

Economics and Sustainability Team

Oxford Economics

SEC climate disclosure rules

The latest post from our sustainability team examines the impact of the recently announced SEC climate disclosure rules

Imagine buying a second-hand car. What information would you like to know? Perhaps its model year, odometer mileage, and fuel efficiency would help you assess how much it will cost to run and how polluting it might be. Maybe you’d like to have a mechanic check under the hood, to assess the risk that your new purchase will sputter out as you drive it off the lot.

Now imagine that the car dealer refused to tell you the mileage and won’t let a mechanic take a look at the car. Would you buy it? Probably not. This example, based on George Akerlof’s classic “market for lemons” theory, shows how market failures arise from a mismatch between what the seller knows and what the buyer knows or — as economists would put it — from an information asymmetry.

Information asymmetries abound in financial markets. Investors can’t know all the ins and outs of a company, but they must make their investment decisions anyway. Financial regulators like the US Securities and Exchange Commission (SEC) can help, by requiring companies to disclose any risks and dependencies that are financially material.

If the SEC could assist in our ill-fated car sale, it would require the dealer to hand over the relevant information. It would also set out how that information should be presented so that you can easily compare it to information provided by other dealers. As a result, you would be able to make the best decision on your car purchase and help the market run efficiently.

SEC climate disclosure rules: making relevant information available

The recently enacted SEC climate disclosure rules require companies to disclose their scope 1 and 2 emissions—from direct activities and purchased energy—if they deem them to be material. However, the SEC climate rules, which stop short of scope 3 emissions (predominantly those produced by their supply chain and customers), present a much lower requirement than faced by organisations operating in places such as Europe, the UK, and under proposal in Canada and Australia.

Since the SEC unveiled its plans to develop proposals aimed at enhancing corporate climate disclosures for investor use, the SEC climate disclosure proposals have been making waves.

While investors have mostly supported the SEC climate disclosure proposals, the reception from some business lobby groups and politicians has been frosty, to say the least. Opponents have claimed everything from agency overreach to violations of free speech and partisan activism. Even now the rules have been announced, there are arguments between those who believe the SEC has gone too far and those who believe it has not gone far enough. Some of these seem likely to end up in court.

Regardless, the SEC climate disclosure rules do not interfere with capital market valuation. The SEC is not in the business of directing investment or making value judgements — that’s for investors to do. Arguably, that is literally investors’ jobs: to put a price on a company by buying or selling stocks. The SEC climate rules are about ensuring relevant information is available, not what is done with it. If an investor decides they aren’t concerned about climate-related risks and other factors, then they don’t have to act on them.

Trust in the claims

Climate change is only one factor that could materially affect investments’ value and returns. Regulation in Europe has taken a broad approach to risk disclosures that highlights other considerations. Nature-related dependencies include the threat that biodiversity loss will cause disruptions to the company’s upstream supply chain, often in countries far beyond the company’s direct sphere of influence. Social and geopolitical factors also come into play.

The SEC’s climate rules take a relatively limited stance to disclosures by focusing only on climate risks, but it is a key first step in providing investors with material information to support their decision-making process. Likewise, it makes sense that consumers of financial products should be able to trust the claims being made about what they are considering investing in.

The divergence of the SEC climate disclosure rules from other requirements being implemented globally (which largely align with each other) may be counterproductive and actually place an increased reporting burden on companies trying to align to multiple jurisdictions. For the organisations impacted by these rules operating across multiple jurisdictions, it seems likely that they will opt to meet the most rigorous requirements for their global markets rather than the complexity of meeting varying levels of stringency in different markets. This means in practice, if not by law, they will effectively be starting the journey to harmonise the information available to financial markets.

Deciding the value of a company in the face of a changing climate and economy is significantly more complex than purchasing a used car. But the same principles apply. Being able to compare products and understand the risks is essential to your willingness to complete a trade. Climate disclosures do not tell you whether you should buy a share or not — just as a car mechanic doesn’t make the final decision on your vehicle purchase. But the information they both provide will give you an indication of the risks and rewards involved, allowing you to make a more informed decision.

What car buyer wouldn’t want to make their purchase based on the best information available? American investors, operating in one of the most mature, innovative, and successful capital markets in the world, deserve the same benefit.

Originally posted on ESG Today in August 2023.
Updated to reflect the SEC’s announcement in March 2024.


Jake Kuyer
Jake Kuyer

Associate Director, Economics & Sustainability

+44 (0) 20 3910 8000

Jake Kuyer

Jake Kuyer

Associate Director, Economics & Sustainability

London, United Kingdom

Jake Kuyer is an Associate Director and leads the Economics & Sustainability team within Economic Impact Consulting. He has extensive experience applying economics to challenges around the environment and social impact. He has managed numerous projects across the public, private and third sectors covering a broad range of fields. At Oxford Economics, he works with our economic models, such as our bespoke Global Sustainability Model, to embed sustainability into our offerings. He works with clients to understand both their impact and dependence on the environment, and to achieve their sustainability ambitions.

Prior to Oxford Economics, he worked for a multi-national engineering firm focusing on environmental impact, an economics think tank focusing on social value, and a boutique consultancy specialising in environmental economics. He has earned degrees with distinction from the University of Victoria, Canada, and the University of Edinburgh, UK.

Sarah Nelson

Senior Economist, Economics & Sustainability

+44 (0)203 910 8000

Sarah Nelson

Senior Economist, Economics & Sustainability

London, United Kingdom

Sarah is a Senior Economist in the Economics & Sustainability team at Oxford Economics. She works with clients to understand their environmental impacts and dependencies, and helps them achieve their sustainability goals. She has professional and research experience in the economics of decarbonisation, energy policy and environmental and economic impact assessments.

Prior to joining Oxford Economics, Sarah worked in economic consulting in Sydney and London, where she worked on energy regulation, anti-trust, carbon forecasting and social welfare assessments. She holds Bachelor’ degree in economics and physics from the University of Auckland, and a Masters in Economics from the University of California, Santa Barbara, where she was a Fulbright Scholar. Sarah completed a PhD in climate economics and policy from the University of Cambridge in 2021.

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