As the cost and risks of climate change continue to mount — global insurance losses from natural disasters have exceeded $100 billion for the last four consecutive years — it is clear that climate and financing are inexorably linked. The SEC’s recent adoption of its climate disclosure rule by a 3-2 vote earlier this month underscores this reality.

The final rule puts a regulatory stake in the ground by requiring companies to disclose their material greenhouse gas emissions, detail climate-related risks, and report on plans to mitigate those risks. This new rule should be viewed as the seismic event that it is: the SEC — which oversees the $100 trillion capital market system in the U.S. — has determined that investors need consistent, comparable and reliable information about the impact of climate risks to make investment decisions.

What’s in

Let’s start with what was included in the final rule.

Disclosure of GHG emissions

Starting in 2027, large accelerated filers — firms with $700 million or more shares held by public investors — must report their scope 1 and scope 2 emissions if deemed material. Large reporters represent roughly 40% of the 7,000 total companies and 60% of the 900 foreign issuers registered with the SEC. Further, accelerated filers — firms with between $75 million and $700 million shares held by public investors — are also subject to scope 1 and 2 disclosure beginning in 2029. Smaller and emerging growth companies are exempt.

This is a critical shift and reflects that a company’s GHG emissions are one of the single most important indicators of its current and future climate-related risks and costs. Importantly, the SEC’s framework for emissions reporting is modeled on the GHG Protocol which is the global standard for calculating emissions and is used by the Task Force on Climate-Related Financial Disclosure, the Science-based Targets Initiative and the Carbon Disclosure Project. 

Assessment of materiality

A new element added to the final rule is that companies are only obligated to report emissions — and most other climate-related data required by the rule — if they determine it is “material” to investors. Compared to the previous proposed rule, this change adds some potential ambiguity by leaving this decision to individual companies. The SEC attempted to limit confusion by defining materiality based on a past Supreme Court decision that said information is material if it alters the mix of total information available to a reasonable investor. The SEC’s emphasis on materiality in its rule also reflects that materiality is a fundamental principle underpinning U.S. securities law.

How companies approach their determination of materiality is a key area to watch. The SEC has grounded its new rule — and framed its application of financial materiality in this case — within the context of how the rising costs of a warming planet can affect a company’s operations and longer-term financial performance. This underscores that a decision not to disclose carries fiduciary risk for companies. The International Accounting Standards Bureau has also recently weighed in on this topic, stating that climate risks could be material even if accounting standards don’t require them.

Reporting on costs, risks and plans

In 2026, large companies must report — in their audited financials — on costs and losses due to extreme weather or other natural conditions. In addition, companies must explain how their management teams will mitigate and manage climate risks and costs. These requirements expand to smaller reporting companies that will begin to report in 2028, based on 2027 data.

Companies face a range of climate-related risks to their physical infrastructure, including equipment, business operations and supply chains. A recent Carbon Disclosure Project report reveals what is at stake: over the next five years, climate-related risks could result in $1.26 trillion in losses in global supply chains. To support companies’ understanding of these risks, a large number of service providers have emerged to provide companies with location- and asset type-specific physical risk hazard assessments. 

Progress on targets

Companies must disclose any climate-related target or goal if that target or goal is reasonably likely to materially impact a company’s business or financial condition. This includes net zero or carbon neutrality goals or other targets outlined in a company’s transition plans.

This provision of the SEC’s rule will help create climate accountability by requiring companies to state how they intend to reach their goals within a time-bound period. This includes reporting on specific projects, allowing investors to benchmark a company’s progress, and assessing how a company is allocating its resources on climate-related matters. For example, it will show whether a company is making progress by upgrading the energy efficiency of its facilities or by simply buying carbon offsets.

What’s out

In terms of what’s out, the main omission is reporting on scope 3 (supply chain) emissions.

Removal of scope 3 emissions

After reviewing over 24,000 comment letters and the onslaught of likely legal challenges to the rule, the SEC dropped the requirement to have companies report scope 3 emissions. Far and away, the inclusion of scope 3 emissions was the most contentious issue in the SEC’s original proposal.

The removal is significant since scope 3 emissions can account for as much as 70% of the average corporate value (supply) chain’s total emissions. This decision also puts the SEC out of sync with other reporting directives and regulations like Europe’s Corporate Sustainability Reporting Directive, or CSRD, the International Sustainability Standards Board, or ISSB, and the State of California, which all require the disclosure of scope 3 emissions.

There is no going back

Even if there is not full alignment or cohesion between the CSRD, ISSB and the new SEC rule, mandated reporting on the disclosure of climate risks is being woven together, stitch by stitch, which strengthens the global reach of these efforts. When the SEC’s rule is paired with other climate reporting directives — in particular, CSRD and ISSB — the shift within the financial landscape will be monumental.

The SEC regulates approximately 40% of the total capital markets in the world. The CSRD, which went into effect in January 2023, has a regulatory reach that spans roughly 50,000 companies across Europe, plus approximately 3,000 U.S businesses. The ISSB is a global initiative and 15 countries, including Australia and the United Kingdom, have already moved to use it as a baseline for their own climate disclosure rules.           

The knock-on effect of having more intertwined global climate disclosure rules is that investors will be able to manage their portfolio risks and more effectively jump into transition finance. Standardizing global reporting will provide investors, and issuers of capital, with much-needed consistency, comparability and decision usefulness of information on climate risks. This will help spur innovation for how to capitalize on the tremendous climate-related investment opportunities and financing needs of the coming decades. This includes an increased focus on blended finance programs, third-party financing using energy as a service, multilateral development bank reform and the Bridgetown Initiative to scale climate investment in the Global South and beyond. 

The SEC’s final climate rule represents clear, forward progress — even if bigger and bolder action is required. The SEC ruling is a start that gets us further than we are right now and this forward, global regulatory momentum signals that there is no going back. And that is a good thing