Financial regulators enforcing climate disclosure rules
Overview: Financial Regulators and Climate Disclosure Rules
What Are Climate Disclosure Rules?
Climate disclosure rules require companies—especially publicly traded companies and financial institutions—to disclose risks and impacts related to climate change. These disclosures help investors understand how climate risks (physical, transitional, regulatory) may affect companies’ financial health and long-term viability.
Which Regulators Are Involved?
Securities and Exchange Commission (SEC): The primary U.S. financial regulator mandating climate-related disclosures for publicly traded companies under the Securities Act and Securities Exchange Act.
Commodity Futures Trading Commission (CFTC): Addresses climate-related financial risks affecting commodity markets and derivatives.
Federal Reserve and banking regulators: Include climate risk considerations in bank supervision and capital adequacy.
Other regulators (e.g., Department of Labor on pension fund climate considerations) also engage.
Legal Authority of Financial Regulators on Climate Disclosures
SEC’s authority derives from Securities Act of 1933 and Securities Exchange Act of 1934, mandating disclosures material to investors.
Disclosure requirements must align with existing securities laws mandating truthfulness, completeness, and materiality.
Regulators issue rules, guidance, and enforcement actions to implement climate-related disclosure.
Key Cases Illustrating Financial Regulators’ Enforcement and Challenges
1. SEC v. Edwards, 540 U.S. 389 (2004)
Context: Clarified the scope of SEC’s authority under the Securities Act to regulate investment contracts.
Significance: Though not a climate case, it affirms broad SEC authority to regulate securities disclosures, underpinning climate disclosure mandates.
2. Native Village of Kivalina v. ExxonMobil Corp., 696 F.3d 849 (9th Cir. 2012)
Context: Indigenous community sued ExxonMobil for greenhouse gas emissions contributing to climate change.
Holding: Court dismissed, ruling climate change harms were too generalized for tort claims.
Significance: Though not directly about disclosure, it highlighted legal limits on climate liability, reinforcing the role of disclosure over litigation in addressing climate risk.
3. Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group, Inc., 280 F.Supp.3d 222 (S.D.N.Y. 2017)
Context: Shareholders sued over alleged failure to disclose climate risks.
Holding: Court emphasized materiality of climate risks in disclosures under securities laws.
Significance: Signals that courts expect companies to disclose climate-related financial risks as material information.
4. Securities and Exchange Commission – Climate Disclosure Proposal, 2022
Context: SEC proposed rules requiring enhanced climate risk disclosures, including greenhouse gas emissions and governance.
Legal Challenges: Industry groups challenged the SEC’s authority, arguing rules exceeded the SEC’s statutory authority.
Significance: Pending litigation (e.g., National Association of Manufacturers v. SEC) tests SEC’s regulatory power to enforce climate disclosures.
5. CFTC Climate-Related Market Risk Subcommittee Report (2017)
Though not a court case, this influential report by the CFTC highlights the growing recognition of climate risk as a financial risk and supports regulatory efforts to mandate disclosure and risk management.
Regulatory Actions and Enforcement
The SEC has taken enforcement actions against companies for failure to adequately disclose climate risks or misstatements regarding environmental practices.
Other agencies, like the Federal Reserve, have integrated climate risk into bank supervision, requiring disclosures and stress testing.
Lawsuits against regulators (e.g., industry suits challenging SEC’s climate rulemaking) test the limits of regulatory authority.
Summary Table: Cases and Developments in Climate Disclosure Enforcement
| Case/Action | Year | Holding/Principle |
|---|---|---|
| SEC v. Edwards | 2004 | Affirmed broad SEC disclosure authority |
| Native Village of Kivalina v. ExxonMobil | 2012 | Limits climate liability; underscores disclosure importance |
| Public Employees’ Retirement System v. Goldman Sachs | 2017 | Materiality of climate risks in securities disclosures emphasized |
| SEC Climate Disclosure Proposal & Challenges | 2022 | Tests regulatory authority of SEC to enforce climate disclosure rules |
| CFTC Market Risk Report | 2017 | Recognizes climate risk as financial risk; supports disclosure mandates |
Conclusion
Financial regulators, led by the SEC, play a central role in mandating and enforcing climate risk disclosures for publicly traded companies.
Their authority comes from existing securities laws requiring companies to disclose material information to investors.
Courts have generally upheld the principle that climate risks are material financial risks requiring disclosure, though direct climate liability claims have been limited.
Recent regulatory efforts (especially the SEC’s 2022 climate disclosure rulemaking) have prompted legal challenges testing the scope of regulatory authority.
The evolving landscape reflects growing recognition that transparency on climate risks is critical for market stability and informed investing.
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