The SEC’s climate disclosure rule was supposed to be the absolute earthquake of corporate reporting. For years, we heard it was going to be the most significant shift in how companies talk to the market since the nineteen-thirties. And then, at the start of twenty-six, it just sort of vanished into the digital ether.
It really did. It went from being the most litigated, discussed, and feared piece of financial regulation in a generation to a historical footnote in the span of about two years. By the way, Herman Poppleberry here, and today’s prompt from Daniel is asking us exactly what happened to that specific proposal. He noted how it ties into our previous looks at impact investing and accounting, and he’s right. This was the missing link that was supposed to make all that data real.
Well, before we dive into the autopsy of a dead regulation, I should mention that today’s episode is powered by Google Gemini three Flash. It’s writing the script while we provide the, uh, slothful and donkey-like charm.
I’ll take the donkey-like charm as a compliment. But look, to understand why this rule died, you have to look at what it was trying to do in the first place back in twenty-twenty-two. The SEC wanted to mandate that public companies disclose their greenhouse gas emissions, their climate-related risks, and how they were transitioning to a lower-carbon economy.
Right, and it wasn’t just "hey, tell us if you like the planet." It was specific. Scope one, scope two, and the big boogeyman, scope three.
Well, not exactly, but you nailed the technical tension. Scope one and two are the emissions you own or the energy you buy. Most big companies already track that. But scope three is the emissions of your entire supply chain and your customers. That’s where the legal warfare started. The SEC saw this as "material" financial information. If a carbon tax hits or a supply chain snaps because of a hurricane, investors need to know.
But the Chamber of Commerce and a whole host of states saw it as "regulatory overreach." They basically said the SEC isn’t the Environmental Protection Agency and shouldn’t be acting like it. So, walk me through the timeline. It’s twenty-twenty-four, the rule gets finalized in a much weaker state than the original draft, and then what?
Then the lawyers took over. Specifically, the Fifth Circuit Court of Appeals. In April of twenty-twenty-four, they issued an administrative stay. For those who aren't legal nerds, a stay is basically a giant "pause" button. It meant the SEC couldn't move forward with implementation while the merits of the lawsuit were being debated.
And the Fifth Circuit isn't exactly known for being a fan of federal agency expansion.
No, they are notoriously skeptical of the "administrative state." The argument used against the SEC was the Major Questions Doctrine. This is a legal theory the Supreme Court has leaned into recently, which basically says that if a federal agency wants to make a rule with "vast economic and political significance," it needs very clear and specific authorization from Congress.
So the SEC says, "We have the authority to protect investors," and the court says, "Protecting investors doesn't mean you get to redesign the global energy reporting system without a new law."
That was the heart of the fight. The litigation got consolidated in the Eighth Circuit later on, but that Fifth Circuit stay was the beginning of the end. It created this weird limbo. Companies didn't know if they should keep building the expensive accounting infrastructure to track these emissions or if they should wait.
I imagine most of them chose to wait, or at least redirected those funds to their legal departments.
Some did. But then we hit twenty-twenty-five. The political climate shifted significantly. We saw a new emphasis on reducing "regulatory burdens." The SEC’s leadership priorities changed. By March of twenty-twenty-five, the SEC actually voted to end its defense of the rule in court.
That’s the white flag right there. If the agency that wrote the rule stops defending it in front of a judge, the rule is effectively a zombie.
It was. The SEC told the Eighth Circuit they were pausing. They basically said, "We aren't going to fight for this version of the rule anymore." And that led us to January fifteenth, twenty-twenty-six. That’s the date of the formal withdrawal. The SEC didn't wait for a court to strike it down; they used notice-and-comment rulemaking to officially rescind the proposal.
Why withdraw it yourself? Why not just let the court kill it?
Control. If the court strikes it down, they might write an opinion that permanently strips the SEC of the power to ever regulate climate disclosures again. By withdrawing it themselves, the SEC leaves the door a tiny bit ajar for a future commission to try a different, perhaps more narrow approach.
It’s a tactical retreat. But for impact investors, this created a massive vacuum. If you’re trying to run a fund that only invests in "green" companies, and there’s no federal standard for what "green" means in a financial statement, you’re back to square one. Or are you?
That’s the irony. The federal rule is dead, but the reporting requirement is very much alive. It just moved. While the SEC was retreating, California was advancing.
You’re talking about Senate Bill two-fifty-three.
Yes. The Climate Corporate Data Accountability Act. This is the real story of twenty-twenty-six. California stepped into the vacuum left by the SEC. They passed a law that requires any company with over one billion dollars in annual revenue that does business in California to disclose scope one, two, and three emissions.
Wait, "does business in California" is a pretty wide net. If a company in Ohio sells three widgets to a guy in San Francisco, do they have to report their global supply chain emissions to the state of California?
Effectively, yes. The revenue threshold is the key, but almost every Fortune five-hundred company does enough business in California to trigger this. So, even though the SEC rule vanished, these companies are still on the hook for the exact same data.
So the "regulatory burden" didn't actually go away; it just became a state-level headache instead of a federal one.
It’s actually worse for the companies in some ways. Instead of one federal standard, they now have a patchwork. They have to deal with California’s requirements, and we’re seeing other states like New York and Illinois considering similar bills. Plus, you have the European Union.
The Corporate Sustainability Reporting Directive.
Well, I shouldn't say that word. But you’re right on the money. The EU’s CSRD is already in effect for twenty-twenty-five and twenty-twenty-six reporting cycles. It applies to many U.S. subsidiaries operating in Europe. So, while the SEC backed off, the rest of the world and the biggest state in the U.S. did not.
So, if I’m an impact investor, I’m not actually looking at a "data desert." I’m looking at a messy, fragmented map.
Precisely. It makes the job of a portfolio manager much harder. Without a standardized SEC filing, you can't just pull the data from a central database like EDGAR and skip the manual verification. You have to hunt through different state disclosures and voluntary reports.
This brings us back to that "impact accounting" idea we’ve talked about. If the government isn't going to mandate the math, the private sector has to step up.
And they are. We’re seeing a rise in private regulation. Organizations like the International Sustainability Standards Board, or ISSB, have released their IFRS S-one and S-two standards. These aren't laws in the U.S., but big institutional investors like BlackRock and State Street are essentially telling companies, "We don't care if the SEC isn't making you do it; we want to see your data aligned with ISSB or we’re voting against your board."
It’s funny how the "free market" sometimes ends up mandating the very things people try to stop the government from mandating.
It’s about risk. If you’re managing trillions of dollars, you can’t ignore climate risk just because a court in New Orleans issued a stay. You need to know if the company you own is going to be underwater, literally or figuratively, in twenty years.
So, let's talk about the specific mechanism of the SEC withdrawal again. You mentioned notice-and-comment rulemaking. That sounds like a long, boring process.
It is, but it’s the legally "bulletproof" way to kill a rule. The SEC had to propose the withdrawal, let the public comment on it, and then issue a final rule that says, "We are no longer doing the original rule." This prevents a future pro-climate administration from just saying, "Oh, the old rule is back on." They would have to start the whole multi-year process over from scratch.
It’s like salted earth for regulation.
In a way. But what’s interesting is the reasoning the SEC gave in the final withdrawal documents in early twenty-six. They didn't just say "politics changed." They focused on the "economic reality of compliance." They cited data showing that the cost for a mid-sized public company to track scope three emissions was significantly higher than their initial twenty-twenty-two estimates.
Well, yeah. Tracking the carbon footprint of every bolt and screw in a supply chain that spans fifty countries sounds like an accounting nightmare.
It is. And that was the strongest argument against the rule. The SEC is supposed to do a cost-benefit analysis. The opponents argued the benefits to investors were speculative while the costs to companies were immediate and massive.
But what about the benefit of not having a systemic financial collapse because we ignored climate risk? Does that get a line item in the SEC’s math?
That’s the philosophical divide. To a regulator focused on market stability, that’s the ultimate benefit. To a lawyer focused on the strict letter of the Securities Exchange Act of nineteen-thirty-four, it’s outside the agency's scope.
Let’s look at the "regulatory vacuum" from the perspective of a company that actually wants to do the right thing. Because there are plenty of companies that were actually happy about the SEC rule because it gave them a level playing field.
That’s a great point. If you’re a company that has spent millions of dollars cleaning up your supply chain and tracking your data, you want your competitors to have to do the same. Otherwise, they look more profitable on paper because they’re "externalizing" those costs.
Right. If I pay extra for green steel and my competitor uses the cheap, dirty stuff, and neither of us has to report it, I just look like I have bad margins.
This is where we see the divergence in the market. We’re seeing a "two-tier" corporate world emerging. You have the companies that are leaning into the California and EU standards because they want to attract capital from ESG-focused funds. And then you have companies that are retreating to the bare minimum federal requirements.
Does this lead to "green-hushing"? I’ve heard that term popping up lately.
It does. Green-hushing is the opposite of green-washing. It’s when companies are actually doing sustainable things but they stop talking about it publicly because they’re afraid of the legal or political backlash.
So instead of pretending to be good, they’re pretending to be... nothing?
Well, again, I shouldn't use that word. But they’re keeping their heads down. They don't want to be targets for "anti-woke" litigation, and they don't want to be sued by activists if their climate goals fall short. The death of the SEC rule actually accelerated green-hushing. Without a safe harbor or a clear federal standard, a lot of companies decided it was safer to say nothing at all.
That seems like a net loss for transparency.
It absolutely is. And it makes it much harder for researchers and impact accountants to verify what’s actually happening. We’re moving from a world of "standardized disclosure" to a world of "private investigations."
So, what should listeners actually do with this? If you’re an investor or you work in a company, the SEC rule is dead, but the pressure isn't gone.
The first takeaway is to stop waiting for a federal "referee." If you were waiting for the SEC to tell you what the rules are, you’re going to be waiting a long time. The action has moved to the state level. If your company does business in California, you need to be looking at SB two-fifty-three and SB two-fifty-four right now. Those are the new "de facto" national standards.
It’s like the California emissions standards for cars. The state is so big that its rules become the rules for everyone.
That’s the "California Effect." If you have to track scope three for your California business, you might as well do it for the whole company. It’s too expensive to have two different accounting systems.
What about for investors?
For investors, the focus has to shift to voluntary frameworks. You need to look at whether a company is reporting to the CDP, formerly the Carbon Disclosure Project, or if they’re following the TCFD, the Task Force on Climate-related Financial Disclosures. Since the SEC isn't going to hand you a nice, neat form, you have to do the legwork yourself.
I’ve also seen some talk about "litigation risk" as the new climate disclosure.
That’s a very sharp observation. Even without an SEC rule, companies still have a general duty to disclose "material risks." If a company knows their factory is in a flood zone and they don't mention it, and then it gets wiped out, they can still be sued for securities fraud under existing laws.
So the lawyers are the regulators now.
They always were, in a way. But now they’re the only ones left in the room. We’re seeing an increase in "private enforcement." If the SEC won't step in, class-action lawyers will.
Let’s circle back to the impact investing angle Daniel mentioned. We looked at how impact accounting is trying to put a dollar value on these things. Does the SEC withdrawal make that harder or easier?
It makes the "accounting" part harder because the raw data is less reliable. But it makes the "impact" part more valuable. If everyone had to report this data, being an impact investor wouldn't be a special skill; it would just be reading a spreadsheet. Now, the ability to actually dig in, find the data, and verify if a company is truly resilient or just "green-hushing" is a massive competitive advantage.
It turns impact investing back into an "active" strategy rather than a "passive" one.
That’s a great way to put it. You can't just buy a "low carbon" index fund and trust the data anymore. You have to be an analyst.
I want to go back to the Fifth Circuit stay for a second. You mentioned it "froze" the rule. How does that actually work for a company? Do they just stop their projects mid-stream?
In many cases, yes. Imagine you’re a Chief Sustainability Officer. You’ve just convinced the board to spend five million dollars on a carbon accounting software suite because "it’s a federal requirement." The day the Fifth Circuit issues that stay, your CFO is in your office asking if they can get a refund on the software.
"Hey, that five million would look a lot better as a dividend right now."
The uncertainty is the real killer. Companies can handle bad news, but they hate "maybe" news. The two-year period between the proposal and the withdrawal was a "maybe" period that wasted a lot of time and money.
And meanwhile, the climate doesn't really care about administrative stays.
That’s the physical reality. Whether or not it’s on a balance sheet, the carbon is still in the atmosphere and the sea levels are still rising. The SEC withdrawal didn't change the risk; it just changed who is responsible for seeing it.
It feels like we’re moving toward a world where "climate risk" is just "risk."
It should be. But until it’s standardized, it’s "invisible risk." And invisible risk is where bubbles happen.
That’s a scary thought. If the market is systematically underpricing climate risk because the disclosures aren't there, we’re building a very fragile system.
That was the SEC’s original argument. They called it "standardization and enhancement." They wanted everyone to use the same yardstick so investors could compare apples to apples. Now, we’re back to comparing apples to oranges to occasional pineapples.
I like pineapples. But I wouldn't want to build a retirement fund out of them.
No, probably not.
So, looking forward to twenty-seven and beyond. Is the era of federal climate regulation just dead? Or is this just a pause?
It depends on the courts. If the Supreme Court continues to strengthen the Major Questions Doctrine, it will be very hard for any agency to do anything big on climate without a new act of Congress. And given the current state of Congress, a new, comprehensive climate disclosure law seems unlikely.
So the "regulatory frontier" is now Sacramento and Brussels, not Washington D.C.
For the foreseeable future, yes. And that’s a massive shift in the global financial order. For decades, the SEC set the pace for the world. Now, they’re the ones lagging behind.
It’s a strange role reversal. The U.S. capital markets are the biggest in the world, but they’re becoming a "black box" for climate data compared to Europe.
And that might eventually hurt our markets. If international investors feel like they can't trust the risk profiles of U.S. companies because the data is missing, they might move their capital elsewhere. Capital flows to transparency.
"Capital flows to transparency." That sounds like something you’d have on a poster in your office, Herman.
I’ll put it right next to my "I Love GAAP Accounting" poster.
You’re a wild man.
But seriously, for anyone listening who is involved in corporate strategy, the message is clear: Audit your portfolio for exposure to state-level mandates. Don't assume that because the SEC backed off, you’re safe. In fact, the lack of a federal standard might actually make your legal liability higher because you don't have a "safe harbor" to hide in.
That’s a great point. If you follow a federal rule, you can say "I was just following the law." If there is no law and you stay silent, you’re on the hook for your own judgment.
And judgment is a lot harder to defend in court than compliance.
Well, this has been a surprisingly deep dive into the death of a document. I think the big "aha" moment for me is that the data hasn't gone away; it’s just gone "underground" into state filings and private frameworks.
It’s more fragmented, more expensive to find, and more important than ever.
A perfect recipe for a podcast episode.
I think so.
Before we wrap up, I should probably mention that if you’re interested in how this ties into the broader world of carbon math, we did a whole dive into the "Carbon Math Paradox" and why climate accounting is so broken in the first place. It’s worth a look if you want to see just how messy those scope three numbers actually are.
It’s the wild west out there.
It really is. Alright, I think we’ve covered the rise and fall of the SEC’s climate dreams.
For now, anyway.
For now. Thanks as always to our producer Hilbert Flumingtop for keeping the gears turning behind the scenes.
And a big thanks to Modal for providing the GPU credits that power our script generation.
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