Regulators Unleash a Climate-Disclosure Triple Threat to Businesses

U.S. businesses are bracing for a new wave of mandatory climate-disclosure policies in 2025 and beyond. The Securities and Exchange Commission, European Union, and California have each adopted disclosure mandates that will impact roughly 15,000 U.S. firms with costly, invasive, and mostly useless disclosure requirements. When these mandates are taken together, U.S. firms will be entangled in a complex regulatory web of confusing disclosures that produce little value for investors and come at great expense.

For investors, this means that meaningful financial updates from companies will be accompanied by mountains of trivial environmental data. Research shows that most U.S. retail investors do not take cues from corporate ESG releases — reporting on environmental, social, and governance metrics — when trading securities.

The administrative costs for all concerned will far exceed the benefits.

Come January 1, the EU’s Climate Sustainability Reporting Directive will begin regulating U.S. firms that generate €150 million or more on EU markets. This will ensnare more than 3,000 U.S. subsidiaries and satellite firms doing business on EU markets for at least two consecutive years.

Then in 2026, California’s three-part rule will target 10,000 public and private firms to report their climate risks, greenhouse-gas data, and carbon credit trading schemes.

On top of this, the SEC’s costly climate-disclosure scheme targets nearly 3,500 public companies. The rule itself has been placed on hold pending litigation.

However, each rule faces its own set of legal woes.

The SEC’s rule has faced the most severe pushback from 25 states and ten lawsuits consolidated in the Iowa v. SEC case currently before the Eighth Circuit. That rule is at a severe disadvantage in court, following the Supreme Court’s 2024 Loper Bright decision ending judicial deference to regulators. In short, the SEC can no longer rely on deference to its statutory disclosure authority to justify a broad inclusion of climate risks. This is because Congress thrice denied the agency relevant authority by declining legislation for mandatory climate disclosures.

The SEC’s rule is also vulnerable to being struck down in court for significantly regulating the public markets in a manner that Congress did not authorize. Under the major questions doctrine, the SEC is prohibited from enacting significant rules without enabling legislation. The Supreme Court’s West Virginia v. EPA decision may be used to invoke the major question doctrine against the SEC’s rule. The agency’s moving forward with such a policy despite congressional opposition is exactly the kind of freelance empire-building that the decision in West Virginia was meant to stop.

While California’s rule is currently being litigated in federal district court, it also faces patchwork funding issues. State officials diverted $22 million from the 2024 budget’s oil and gas subsidies to fund the rule’s implementation. The rule is also propped up by annual revenue taken from the state’s general fund.

If California continues to see an exodus of large businesses to other states, its rule may lack the requisite funding before it officially takes effect in 2026.

The EU’s directive also faces a major implementation problem. While the rule is tethered to the European Green Deal, less than two-thirds of member states have codified it. And most states have only achieved partial adoption, given the convoluted nature of the directive’s reporting framework and unrealistic net-zero targets.

These draconian disclosure laws constitute a triple compliance burden. The long-term consequences will be devastating for business growth and deter new entry into U.S. and European markets. A key deterrent to market entry is the Scope 3 reporting requirement for the EU and California mandates.

Scope 3 reporting (covering all energy use related to a firm’s products, including by suppliers and customers) extends the regulatory reach of these climate disclosures. It captures many smaller private partners on the registrant’s value chain. Yet the EU and California regulators ignore voluntary disclosure data revealing that 91 percent of firms are incapable of sufficiently reporting their Scope 1 through 3 greenhouse-gas emissions.

The rules also seem to be actively competing for the costliest compliance requirements.

The EU’s compliance costs tower at $2.6 million for each firm. As part of the immense cost burden, businesses will need to satisfy a mandatory assurance report. This will require firms to hire a specialist to quantify and validate the perceived environmental risks disclosed.

While such a report is complicated enough, U.S. firms will be caught especially off-guard by the EU directive’s “double-materiality” requirement. As part of a firm’s assurance reporting, the EU demands that companies report their material financial risks merged with external environmental impact stemming from their corporate activities. This experimental standard runs counter to what U.S. firms are accustomed to under long-standing SEC rules.

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