SEC’s Climate Rules Are No Environmental Crusade

The Securities and Exchange Commission proposed rules on Monday that would require publicly traded companies to disclose a variety of climate-related risks and metrics, including greenhouse gas emissions. The reason is plain: Investors want more information about how companies are dealing with climate change, and it’s the SEC’s job to get it for them.

But not everyone sees it that way. In a Wall Street Journal op-ed on Monday, Jay Clayton, the former SEC chair and my former colleague at Sullivan & Cromwell, and Patrick McHenry, ranking member of the House Financial Services Committee, argued that the proposed climate rules are less about disclosure and more about dictating climate policy, a job that should be left to Congress.

It’s a strange reading of the SEC’s proposal because disclosure is data, not policy. Requiring companies to disclose information investors need to make fully informed investment decisions has long been a bedrock principle of U.S. financial markets. The SEC’s proposal merely extends that principle to climate-related disclosure that investors say they need. Yes, as with any other corporate disclosure, it will also aid researchers, activists and policy makers, but the data by itself doesn’t compel any action or policy.

This conflation of data and policy springs from a broader confusion around environmental, social and governance investing. ESG is an investing style, not a climate crusade, no different from growth or value investing or any other style that seeks to enhance the performance of a portfolio. Imagine trying to identify the fastest-growing companies or the cheapest ones without financial disclosures. To ESG investors, buying a company without understanding its climate-related policies, vulnerabilities and impact is just as unthinkable.

In that sense, the SEC’s proposal can’t even be called ESG. Climate-related disclosures are no more ESG than a balance sheet or income statement is value or growth investing. Climate data are merely building blocks for constructing an ESG portfolio, the same as disclosures that underpin other investing styles.