The Securities and Exchange Commission proposed on May 29th to rescind rules requiring companies to provide certain climate-related information in their registration statements and annual reports. Perhaps we are truly free once and for all of climate change risk? I was noodling on this as I saw yet another wildfire crop up on my local fire watch radar.
There is an important distinction between disclosure risk and underlying economic risk. Eliminating a disclosure requirement may reduce compliance costs, legal exposure, and reporting burdens for companies. It does not eliminate the underlying physical, transition, regulatory, or market risks associated with climate change. Those risks continue to exist whether they are reported in a standardized format or not.
From a fiduciary perspective, ERISA has never required plan fiduciaries to care about climate risk because it is "climate." Fiduciaries care about it when it is a financially material risk. If rising insurance costs, water scarcity, extreme weather, stranded assets, supply-chain disruptions, carbon pricing, or changing consumer preferences could affect an investment's future cash flows, then those are economic considerations. The label attached to the risk is largely irrelevant. A prudent fiduciary should evaluate material risks regardless of whether the SEC requires a specific disclosure form. This is consistent with the broader principle that fiduciaries evaluate all financially relevant information.
In fact, one could argue that the rescission of the rule makes the fiduciary's job somewhat harder. Standardized disclosures can create more comparable data across companies. Without them, investors may need to rely on a patchwork of voluntary reporting, state requirements, international standards, and independent research. The SEC's current position is that material climate risks can still be disclosed under existing securities laws if they are financially relevant; the agency's objection is primarily to the specific climate-disclosure framework rather than to the concept of material risk disclosure itself.
There is also a practical reality that many large companies will continue reporting climate-related information regardless of what happens at the federal level. California disclosure requirements, European reporting standards, lender requirements, insurers, institutional investors, and large customers all continue to create demand for climate-related data. Many multinational firms simply cannot ignore those expectations.
For my plan sponsor audience, I would frame it this way:
The SEC's proposed withdrawal of climate disclosure rules reduces a reporting requirement. It does not reduce climate-related financial risks. Fiduciaries are still expected to evaluate material risks that could affect investment performance, whether those risks stem from inflation, interest rates, geopolitical events, cybersecurity, artificial intelligence, or climate change. The prudent process remains the same: identify material risks, evaluate them objectively, document the analysis, and make decisions in participants' best interests.
That framing also aligns with a theme I often emphasize: the specific issue changes, but the fiduciary standard does not. Twenty years ago the discussion might have been Enron, subprime mortgages, or cybersecurity. Today it may be climate risk or AI risk.
The Parting Glass
The common thread is still a documented, prudent process for evaluating material investment risks. Climate risk is not a special category; it is simply one more potential source of financial risk that fiduciaries may need to consider when it is relevant. Not disclosing the risk (or worse, ignoring the risk) will not make it go away.
Framing it a different way, just because the lighthouse is not flashing its warning does not mean the risk is gone.