On March 6, 2024, the Securities and Exchange Commission (SEC) made its highly anticipated yet controversial landmark decision that will undoubtedly affect many public businesses. [i] By a vote of 3-2, members of the SEC issued a final rule that will now require public businesses to disclose climate-related risk on their annual reports. This decision marks a pivotal moment in the intersection of business and sustainability, with far-reaching implications for companies, investors, and the global community.[ii]

In recent years, the urgency of addressing climate change has become increasingly apparent, prompting governments, organizations, and investors to take action. The SEC has recognized the significance of climate-related risks and their impact on financial markets, leading to the implementation of new disclosure rules. These rules aim to enhance transparency surrounding climate-related information. They will now require public companies to disclose information regarding climate-related risks; identification, oversight, and management of such risks; the impact these risks might have on the business; climate-related targets and goals; data relating to a company’s greenhouse gas emissions; and climate-related capitalized costs, expenditure, charges and losses, and impacts on financial statement estimates.[iii] Despite the numerous supporters, the SEC final rule has been met with extreme opposition, and companies fear that they will have to abandon their shareholder primacy corporate governance model and, as a result, risk the loss of profit.[iv]

In general, a company that has a shareholder primacy model of corporate governance places its focus on adopting business practices that aim to maximize the interests of the shareholders before considering the interests of other corporate stakeholders such as employees, consumers, community, or the environment; this typically means utilizing business practices that will result in a more significant profit to the shareholders.[v] Moreover, shareholder primacy is not only the norm that most companies follow, but the seminal corporate law case of Dodge v. Ford Motor Co. created a legal obligation for directors of a company to make decisions that are in the best interest of the shareholders as opposed to its employees, customers, or the community.[vi] In stark contrast, a company can structure itself to have a stakeholder corporate governance model.[vii] A company that has a stakeholder model of corporate governance will adopt business practices that primarily focus on benefitting various types of stakeholders in the company, including directors, employees, consumers, and the community.[viii] Typically, a company that has adopted a stakeholder model places more emphasis on the effect of corporate activity, not just in terms of the company itself, but in terms of how the corporate activity impacts the community and environment, and less emphasis on the overall profit of the company.[ix]

The increasing attention to environmental issues, particularly among younger generations like Gen Z and Millennials, has amplified the importance of sustainability in consumer and employment choices.[x] Against this backdrop, the new SEC climate disclosure requirements force companies to consider how these disclosures may affect their public image. Companies operating in carbon-intensive industries face heightened scrutiny and reputational risks, potentially leading to stakeholder backlash and investor divestment. Moreover, research has shown that sustainability in business reduces profitability. [xi] Therefore, efforts to mitigate this backlash and investor divestment by reducing a company’s carbon emissions and increasing sustainability practices could come at a high cost. Not to mention, companies that have no current system in place to analyze climate-related risks are now forced to spend money on establishing a way to gather and analyze this information to meet the disclosure requirements.

Collectively, these factors pose significant financial challenges to companies and jeopardize shareholder profits. Understandably, many companies are frustrated with the new disclosure requirements, which appear to contradict established norms of shareholder primacy. By effectively compelling companies to factor environmental considerations into decision-making processes, the SEC’s climate-related disclosure requirements signify a shift towards stakeholder-oriented corporate governance models.