This week, the U.S. Securities and Exchange Commission (SEC) issued a long-awaited set of climate rules, requiring most publicly traded companies to disclose their greenhouse gas emissions and climate risks on their balance sheets.

Unfortunately, under intense lobbying from many businesses, the federal agency has relaxed some of the restrictions on the regulations, weakening their effectiveness and missing the best opportunity for the U.S. government to compel businesses to consider the increasingly severe dangers of global warming over the next period.

Currently, there is a growing recognition that climate risk is financial risk, a trend that has driven the introduction of new regulations. Global businesses are now facing supply chain disruption risks related to climate issues.

Their physical assets are vulnerable to storms, their employees are exposed to extreme heat, and some of their customers may be forced to relocate elsewhere.

They have some fossil fuel assets on their balance sheets that may never be sold, and the rapidly changing Earth's environment will challenge their business models.The impact is not limited to coal and oil companies; it also includes utility companies, transportation companies, material manufacturers, consumer goods companies, and even food companies.

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Investors, including you, me, and our elders at home, are buying and holding these fossil fuel-related stocks, often unknowingly, because many pension funds in various countries are involved.

Investors, policymakers, and the public all need clearer, higher-quality information to understand how companies have accelerated climate change, what they are doing to address these impacts, and what the ripple effects mean for their bottom line.

The new rules issued by the U.S. Securities and Exchange Commission formally establish and authorize a voluntary corporate carbon governance system, requiring companies to report the potential impact of climate-related risks on their business.

They must also disclose the "direct emissions" of energy they own or control, as well as the indirect emissions generated by "purchasing energy," which usually means they have to disclose the electricity and heat they use.But it is crucial to note that companies are only required to do so when they determine that this information is "material" in financial terms. This provides companies with considerable latitude to decide whether to provide these details.

The original draft of the U.S. Securities and Exchange Commission's rules also required companies to report emissions from "upstream and downstream activities" in their value chain. This typically refers to the emissions related to suppliers and customers, which usually account for 80% of a company's total climate pollution.

However, corporate lobbying groups exerted tremendous pressure, leading to the removal of this requirement in the formal regulations, while adding the qualifier "material."

It can be affirmed that these rules help to provide a clearer understanding of how companies are addressing climate change and their contributions to it. Out of caution, many companies may tend to consider emissions as material.

Clearer information will help to encourage corporate climate action. Companies will be concerned about their reputation, as they increasingly feel pressure from customers, competitors, and investors to reduce emissions.The U.S. Securities and Exchange Commission (SEC) could have been more stringent, and it should have been. After all, the European Union's similar policies are much more comprehensive and stringent.

The California Emissions Disclosure Act, signed in October 2023, goes a step further, requiring public and private companies with revenues exceeding $10 billion to report each type of emission, which is then audited by third parties.

Unfortunately, the SEC's regulations only put companies at the starting point of the procedures needed for economic decarbonization, when they should have gone deeper.

We know that the strength of these rules is not enough because there are already companies following similar voluntary agreements, yet they have made little progress in reducing greenhouse gas emissions.

The SEC's disclosure system faces two fundamental problems, which limit the use and effectiveness of any carbon accounting and reporting.The first issue pertains to the data itself. Regulations by the U.S. Securities and Exchange Commission (SEC) grant companies considerable freedom in carbon accounting, allowing them to set different boundaries for their "carbon footprint," model and measure emissions in various ways, and even change the way they report emissions.

In general, the corporate reports we end up with may be incomplete, possibly only reflecting a portion of the previous year's emissions, and we cannot determine what actual efforts the company has made to reduce carbon pollution.

The second issue is the limitations in how stakeholders use this data. Many companies are currently voluntarily fulfilling their climate commitments, but as we have already seen, the significant differences in reporting make it impossible for us to accurately compare companies.

As the New Climate Institute has stated, the rapid increase in the number of corporate climate commitments, coupled with the dispersion of methods and a general lack of regulation or oversight, means that it is harder than ever to distinguish between genuine climate leaders and unverified "greenwashing."

Some investors assess carbon emissions, decarbonization plans, and climate risks through ESG (Environmental, Social, and Corporate Governance) ratings, but this practice only leads to what some scholars call "overall chaos."Few companies have been penalized for failing to disclose emissions clearly or for not meeting their own standards. All of this means that the new carbon accounting and reporting rules issued by the U.S. Securities and Exchange Commission largely replicate the problems of voluntary corporate action.

Because it does not make hard requirements for consistent and actionable disclosure, it cannot drive the transformation we need at the speed we need.

Companies, investors, and the public are calling for rules that can drive internal corporate change and can be properly evaluated from the outside.

This system needs to track the main sources of corporate emissions and encourage companies to make real investments internally and throughout the supply chain to strive for deep emission reductions.

The good news is that, despite the existing rules being limited and flawed, regulatory agencies, regions, and companies can take more meaningful climate action on this basis.The smartest companies and investors are no longer confined to the regulations of the U.S. Securities and Exchange Commission (SEC). They are developing better systems to track the drivers and costs of carbon emissions and taking concrete measures to address these issues, including reducing fuel use, building energy-efficient infrastructure, and adopting low-carbon materials, products, and processes.

Now, seeking genuine cost savings through carbon reduction is a good business.

The SEC has taken an important first step, which, despite its flaws, has prompted our financial regulations to include climate impacts and risks.

However, regulatory agencies and businesses need to pick up the pace from now on, ensuring that they have a clear understanding of how quickly companies are taking measures and making investments, whether it is fast enough to cope with a transforming economy, and whether it meets the pace required to thrive on a planet with increasing climate risks.