A Defense of the SEC’s Standardization of Climate-Related Disclosures

Introduction.

On March 6, 2024, the Securities and Exchange Commission (SEC) adopted new rules regarding the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (“Rules”). The Rules would require publicly traded companies to disclose climate-related risks to their current and future operations, greenhouse gas emissions, and the potential effects of climate-related events on their financial statements, among other key disclosures.

Despite representing a new opportunity for greater transparency in a regulatory environment based on disclosure obligations, multiple States and private parties challenged the Rules, which were consolidated under the Administrative Procedure Act. As a new administration took office in 2025, the SEC voted to end its defense of the Rules, with the Acting Chairman stating that they would “cease [their] involvement in the defense of the costly and unnecessarily intrusive climate disclosure rules.”

All of this goes in line with the politicized critiques of stakeholder governance and ESG factors (environmental, social and governance), and defenses of shareholder primacy as the most appropriate way for directors and managers to run businesses. However, the Rules served as an important protection for investors in their efforts to measure risk, and that ESG factors in general are not meant to be placeholders for political views but rather an essential part of a corporation’s risk management efforts.

The Rules Improved the Standards of ESG Reporting.

One vocal critic of ESG—and the Rules—is SEC Commissioner Hester M. Peirce who, in the 17^th Annual SEC Conference for the Center for Corporate Reporting and Governance, echoed Milton Friedman’s famous 1970 article that viewed the situation as a zero-sum game between social responsibility and profit maximization. As part of her critiques, she stated that the ESG factors that existed at the time had no clear standards that were measurable or comparable. There is some truth to this argument: a study by The Economist shows that because the indicators used in markets are so broad, they lead to wildly different interpretations about similar events that could make the whole system less credible. A good example was that of Tesla. The company should have scored well environmentally, in theory, because of its business model being rooted in the energy transition away from fossil fuel transportation. However, Tesla was removed from the S&P 500 ESG Index because of social factors, particularly in light of claims of ‘rampant racism’ and evidence that one of its factories was racially segregated in terms of work assignments, pay, discipline and promotion.

Peirce then criticized existing efforts to establish standards for ESG reporting—presumably including the Rules—where she said that, unlike financial reporting, many of these factors are not easily comparable across corporations. However, this view understates the extent to which (a) correctly focused disclosure obligations could meaningfully create more useful information for market decision-making, and (b) financial reporting allows only limited comparability, and cross-industry comparisons often provide little insight for investors.

Regarding the first argument, the Rules created specific reporting standards without a designation of value by independent entities and removed possibilities for confusing scores without clear criteria, as it happened on Tesla’s case. Additionally, the Rules go in line with the United States’ preferred mode of regulating publicly traded companies (i.e., disclosure obligations) to provide investors with clear information to factor into their own decision-making.

Regarding the second argument, there is reason to believe these climate disclosures could serve a similar function to financial disclosures in terms of generating proper opportunities of comparison. Peirce states that financial reporting provides investors the opportunity to compare the statements of two companies to determine which is performing better. However, this has its own set of limitations. A cash-generating company that requires no additional growth or investment in the food sector is very different to a company that is investing heavily in research & development in the technology sector. Comparing both companies may yield no useful information, and an investor needs to find comparisons within the same industries to know if a company is over-performing or under-performing. In a similar sense, the Rules can serve as a benchmark for companies in similar industries to see how they are handling climate-related risks.

A Broader Case for ESG as Risk Management.

The broad, politicized opposition to the Rules seems rooted in continued support for shareholder primacy, as popularized by Milton Friedman. As written above, Friedman viewed the debate as a zero-sum game between social responsibility and profit maximization. How it works in practice, however, is far more complex. Martin Lipton defines ESG as not a unitary principle—be it moral or political—but rather a wide range of risks and opportunities that a corporation must balance in seeking to achieve long-term value.

Lipton goes on to support ESG as it relates to climate change, stating that embracing ESG does not mean that a company will make decisions exclusively to prevent climate change, but rather to measure the risks and efforts made to create an optimal outcome for the company.

In a broader sense, equating ESG to personal or political values removes any kind of nuance for long-term value creation. If profit maximization requires companies to keep their accounts payable as long as possible, to pay employees as little as they can, and dump waste without considering the safety implications, that will of course generate high short-term returns, but it will not be a sustainable solution for the company. ESG is an important part of measuring that long-term value creation, and the Rules are an important step to inform investors on those risks and opportunities towards the long term.

Conclusion.

Early criticisms of ESG saw it as no more than what managers or companies or funds chose to pursue based on their own beliefs, and that the lack of clear standards contributed to this problem of vagueness of purpose. The Rules represent a meaningful step toward addressing that vagueness by providing clear disclosure requirements that could be comparable in a similar way to financial disclosures. Going back to the SEC Acting Chairman’s statement, these obligations could be costly in the same way financial disclosures are, but they are necessary for investors to consider risks and drive corporations towards long-term value creation.

Ricardo A. Larrazabal is an LL.M. (Corporation Law) candidate at NYU School of Law and serves as a Graduate Editor of the NYU Journal of Law & Business. Before attending NYU, Ricardo worked as an Associate in the Corporate/M&A team at a leading law firm in Caracas, Venezuela, and also completed a Master’s in Finance at Venezuela’s leading business school as class valedictorian. His practice is focused on local and cross-border M&A, projects, and general corporate matters across the energy, financial and technology industries.