Under the leadership of Gary Gensler, the U.S. Securities and Exchange Commission saw a wave of regulatory and enforcement actions relating to environmental, social, and governance; sustainability; and climate change. Gensler’s resignation as Chair of the Commission not only signals a new direction for the agency but will most likely result in many green initiatives being rolled back. The result will frustrate climate activists but may give U.S. businesses a strategic advantage in the global market.
Following the Paris Agreement in 2015, a series of global initiatives were pursued to reduce the impacts of climate change and reduce overall greenhouse gas emissions to “net zero” by 2050. The goal included a significant reduction in GHG emissions, but also utilized “offsets” that, through technology and protection of natural resources, would result in overall emissions being at a net of zero. This resulted in a carbon credit market that allowed high GHG emitting countries and businesses to purchase credits from underdeveloped countries that produce little emissions.
On the financial side, a multi-prong approach was used to influence and regulate businesses. Large investment firms, like BlackRock, used their influence to drive ESG and sustainability. By 2021, it was standard practice for businesses to release annual ESG and sustainability reports. However, there was no standardization of the practice. Claims were unregulated and content was unclear. As a result, reports were focused on what the business thought mattered to investors and were little more than marketing pieces.
This became problematic in the highly regulated financial industry. Funds that claim to be ESG, green, climate friendly, or sustainable must back up those claims with data. As a result of demand and Paris Agreement based initiatives, international regulators began drafting standards for reporting, marketing, and investments relating to climate change and other green initiatives.
In 2021, the International Sustainability Standards Board drafted the International Financial Reporting Standards Foundation’s Sustainability Disclosure Standards. IFRS is an independent, nonprofit organization that develops financial reporting standards, including international accounting standards. IFRS is not used in the U.S., who uses generally accepted accounting principles, also known as GAAP, but is used in 132 jurisdictions. The IFRS Standards were adopted in June 2023 as the global standard for sustainability and climate change reporting, including greenhouse gas emissions.
In the US, the SEC proposed the development of climate-related reporting standards in March 2022. The final rule, adopted on March 6, 2024, required large publicly traded companies to disclose climate action, GHG emissions, and the financial impacts of severe weather events. The Climate-Related Disclosure Rule was initially set to go into effect in 2026. However, it was immediately met with legal challenges and the SEC delayed implementation indefinitely while the cases worked through the judicial process.
A series of companion rules and initiatives were also implemented during the same period. The SEC created a Climate and ESG Enforcement Task Force in March 2021 to “develop initiatives to proactively identify ESG-related misconduct.” The SEC quietly disbanded the Task Force in September 2024.
In April 2021, the SEC Division of Examinations issued a Risk Alert relating to ESG. The Division conducts exams, their terminology for reviews of SEC filings of publicly traded companies and investment funds for compliance with regulations. They also issue periodic Risk Alerts making companies aware of areas of focus and concern. The April 2021 alert showed a new focus on ESG and stayed an annual priority until 2023, when it was quietly omitted. It returned in a November 4 Risk Alert that addressed ESG claims made by funds.
This aligns with the Names Rule, amended in September 2023, to take into consideration ESG. Under the rule, funds with phrases related to environmental, social, or governance factors, including climate and sustainability, will be forced to align 80% of the investment with those names. This is most likely the reason why ESG was removed from priorities in 2023 and is now reemerging, as it gave funds time to adjust to the new rule. In 2024, the SEC penalized a number of high-profile funds for failure to comply with the rule.
Under Gensler, the SEC has also introduced other initiatives relating to ESG, including a focus on the composure of boards and internal policies. The future of these initiatives is in question with Gensler’s exit.
Traditionally, the Chair of the SEC tenders their resignation following a presidential election, even when they have time left in their term. This allows the incoming administration the ability to make their own selection for the role. As expected, Gensler, a Democrat that served under Presidents Clinton, Obama, and Biden, submitted his resignation on November 21, effective the end of Biden’s term.
With Gensler’s exit, there will be a notable shift in priorities for the incoming chair. At the Workiva Amplify Conference in September, David Peavler, a former attorney for the SEC and current partner at Jones Day, addressed the impacts of the then potential change. He stated he believes that the Trump Administration will either drop or repeal the climate rules. Looking at the overall direction of the SEC, he believes there will be shift away from new initiatives and rulemaking, as has been the case under Gensler, and a refocus on enforcement.
While ESG was a still relatively unknown concept during Trump’s first term, the Department of Labor did take action to limit its impact. In 2019, the DOL issued a rule under the Employee Retirement Income Security Act of 1974 that found the consideration of ESG by fund managers was a violation of their fiduciary duty. The Biden Administration partially reversed the DOL ERISA opinion in 2021, stating that ESG may be considered as a factor, but only as a tiebreaker if both investment opportunities offer identical returns.
Expect a similar approach under the next Trump Administration. The next SEC chair will most likely methodically undo the ESG and climate related reporting standards imposed under Biden and Gensler. The SEC will refocus on traditional financial consideration, effectively killing ESG at the national level. Although, companies will still have to comply with international regulations and state level requirements.
This may give U.S. businesses a strategic advantage in the global market. Concerns have been rising in the European Union that their corporate sustainability reporting requirements are harming the EU economy. Following the June 2024 Parliament elections, the incoming leadership has stated their intent to reduce the “regulatory burden” on businesses, including consolidating three key pieces of climate related regulations. Other jurisdictions have imposed costly reporting requirements under the IFRS Sustainability Standards.
Climate activists argue the the costs are not only worth it, but are necessary to reduce the impacts of climate change in a shift towards a “climate economy.” However, the Trump administration has stated clear opposition to the concept and business as usual. The removal of the SEC sustainability/ ESG focus will allow U.S. businesses to continue to focus entirely on profits, giving them a competitive edge, at least in the short term.
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