Materiality or Deregulation? The Future of Climate-Risk Disclosure Under Federal Securities Law
Federal securities law has long required publicly traded companies to disclose information that investors need to make informed decisions. Determining what information belongs in those disclosures, however, has become increasingly contentious as climate change creates new financial risks for American businesses. Companies must concern themselves with rising insurance costs, extreme weather events, changing energy markets, and the transition toward a lower-carbon economy, as all of these factors can affect assets, liabilities, and long-term financial outlook. In 2024, the SEC adopted rules intended to standardize climate-related disclosures for investors. The overall goal behind the rules was to make climate-related financial information more consistent and comparable between companies, thereby aiding investors in making decisions. Opponents of the rules are concerned that the SEC exceeded its authority and imposed excessive compliance costs, arguing that the requirements go beyond traditional financial disclosure. Now, the SEC has proposed a complete rescission of the rules. The difficulty lies in determining whether materiality rules and standardization can coexist and provide investors with the most relevant information.
What is Climate-Risk Disclosure?
Climate-risk disclosure refers to the information publicly traded companies provide investors about the financial risks and consequences associated with climate change. These risks are usually divided into physical risks and transition risks. Physical risks, such as damage from severe weather, arise from direct effects of climate change. By contrast, transition risks arise from regulatory, technological, and market changes associated with the shift toward a lower-carbon economy. While these risks differ, both can affect financial performance.. Climate risk should also be distinguished from climate impact. Climate impact concerns a company’s effect on the environment, while climate risk concerns the environment’s effect on the company. Federal securities law is principally concerned with providing investors with information material to their investment decisions, rather than requiring companies to report every aspect of their environmental footprint.
Statutory Background
Under the Securities Act of 1933 and the Securities Exchange Act of 1934, the SEC has broad authority to create disclosure requirements, but that authority operates within the framework of federal securities law and its emphasis on materiality. In 2010, the SEC issued guidance on how climate-related risks applied to existing disclosure requirements and left companies to determine which risks warranted disclosure. The guidance did not create new requirements. In 2022, the SEC proposed a more comprehensive climate-disclosure framework, and in March 2024 it adopted a narrower final rule.The rule required certain disclosures concerning material climate risks, corporate oversight, risk management, and, for specified registrants, greenhouse gas emissions.
The rule quickly faced legal challenges alleging that the SEC had exceeded its statutory authority and imposed unjustified compliance costs. The SEC stayed enforcement of the rule in April, 2024 and voted to stop defending it in March 2025; the Eighth Circuit has held the case in abeyance since September 2025. As of October 2026, this rescission remains proposed rather than finalized. The dispute ultimately focuses on whether standardized climate disclosures are necessary to protect investors or whether disclosure requirements must remain strictly tied to each company's financial materiality.
Side 1: The Focus on Standardization
Standardization is important to investors, as it is necessary to provide investors with information sufficient with which to accurately evaluate risk. Upon the SEC’s adoption of the 2024 rule, Commissioner Crenshaw expressed concern of how companies were using different frameworks and were reporting varying levels of detail. With such inconsistencies, investors were left with the difficult task of comparing companies and assessing how climate-related risks could affect their financial performance. Standardized disclosure requirements addressed this problem by establishing a common baseline for reporting financially significant risks. Importantly, standardization does not necessarily require every company to disclose identical information. Rather, the SEC could establish consistent reporting methods while allowing companies to identify risks relevant to their particular circumstances. From this perspective, standardized climate disclosure supports the existing purpose of federal securities law by improving the quality and comparability of information available to investors.
Critics argued, however, that the 2024 rule was overly burdensome to companies, especially because companies face different risks depending on their industries, locations, and operations. While standardization of disclosure rules would overall benefit investors, it is imperative that it does not do so by forcing undue costs upon companies. The SEC’s task now is to determine the scope of standardization without imposing unnecessary requirements.
Side 2: The Focus on Materiality
Opponents of standardized climate disclosure argue that the SEC's primary responsibility is to protect investors by requiring financially material information, not to establish a broad environmental reporting regime. Under TSC Industries, Inc. v. Northway, Inc. and Basic Inc. v. Levinson, information is generally material when there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. One of the 2024 rule’s opponents was Commissioner Peirce, who claimed the rule upheld materiality in name alone. Peirce argued that the 2024 rule disregarded materiality, and she emphasizes the important role materiality plays in balancing costs and benefits. She also distinguished climate data from financial data, arguing that climate data rests on uncertain estimates and assumptions.
A materiality-based approach focuses on relevant information that an investor would reasonably rely on when making decisions. This approach grants companies the ability to assess and disclose risks based on individual circumstances. By contrast, the 2024 rule could require companies to allocate resources to obtaining information that they determine to be immaterial. In essence, materiality ensures companies report information relevant to investor decision-making while limiting unnecessary burdens.
Potential Implications
The SEC’s proposed rescission of the 2024 rule could impact public companies, investors, and the broader securities market. While companies would still need to evaluate whether climate factors significantly influence their financial condition, there would be a removal of the dedicated disclosure framework. For investors, rescission could ultimately reduce consistency of climate-related information, which could lead to a heavier reliance on third-party data providers and independent research. Conversely, the rescission could reduce compliance expenses and avoid requiring reporting with little or no financial relevance.
Some jurisdictions have established their own climate disclosure regulations. California Senate Bill 253 and California Senate Bill 261, for example, detail the climate disclosure rules for companies doing business in the state. Without a federal framework, companies may face a patchwork of state requirements, which strengthens the case for a uniform federal standard.
Conclusion
Standardization and materiality are not necessarily incompatible. The SEC could establish consistent reporting methods while limiting mandatory disclosures to information relevant to a company's financial circumstances. A new rule balancing materiality and standardization could improve comparability without requiring every company to report identical information regardless of risk exposure. Neither unrestricted disclosure mandates nor the categorical exclusion of climate-related information likely serves investors best. A balanced framework would prioritize material financial risks, provide meaningful and comparable information, and remain within the SEC’s authority. The future of climate-risk disclosure will hinge on how the competing principles of standardization and materiality can be reconciled through regulation and litigation.
*The views expressed in this article do not represent the views of Santa Clara University.
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