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SEC Chair Gary Gensler has a question for you: What do investment funds and fat-free milk have in common?

If it’s easy to tell whether milk is fat-free by just looking at the nutrition label, it may be time to make it easier to tell if sustainability-focused funds are what they say they are.

Voluntary climate disclosure among companies has increased considerably over the past decade in the United States. If you’ve read the most recent IPCC report, you might get the sense that this growth is something of a win for reporting’s sake.

But the voluntary disclosure paradigm has not delivered the level and speed of change that the capital markets could stimulate for myriad reasons. Three key reasons: a lack of consistency in reporting standards and structure; incomparability across voluntary reporting frameworks; and a heavy reliance on a narrative description of a firm’s commitment to and progress on sustainability.

Flowers breaking their way through cracks in sidewalks and folks riding bikes against bucolic backgrounds are pleasant to look at, but not especially decision-useful for investors. Is knowing that the XYZ Corporation's passionate commitment to sustainability comes from deep inside its DNA all that helpful in assessing whether it's a long-term, clean economy, transition-ready investment? Does it provide any insight into climate risk mitigation?

If it’s easy to tell whether milk is fat-free by just looking at the nutrition label, it may be time to make it easier to tell if sustainability-focused funds are what they say they are.

The SEC says it plans to propose rules on mandating disclosure from public firms on climate and associated risks as early as March 21, although not without opposition within the agency and litigation from elected officials and others who continue to push back against what they see as regulatory overreach.

The ESG profession has boomed of late, but there is a core group of folks who have been tirelessly working to set the stage for this moment, and who put in much of that work long before it was evident that there would be any payout. I checked in with a few of these pioneers recently.

Tim Mohin, former chief executive at GRI and now CSO at Persefoni, a climate management and accounting platform, summed up his sentiments succinctly regarding the upcoming SEC ruling: "Finally!"

As we await the (hopefully) weeks until the SEC proposes rules on climate disclosure, I’d like to share three key takeaways to keep in mind on the matter.

SEC, what big teeth you have!

The formation of the International Sustainability Standards Board (ISSB) last year delivered one of the most significant changes in corporate reporting since the 1930s. 2022 is set to similarly deliver, but with teeth.

Many of us in the ESG space celebrated last year when roughly $1 in $3 globally was invested with some form of ESG strategy. But ESG investing without regulatory pressure and parameters is turning out to be more bark than bite.

For example, last month Morningstar removed over 1,200 funds valued at $1.4 trillion from its European sustainable investment list after an "extensive review" of their legal documents. Hortense Bioy, Morningstar’s global director of sustainability research, discovered problems such as ambiguous language in legal filings that warranted this change in categorization per the EU’s Sustainable Finance Disclosure Regulation.

How will the SEC’s regulation likely address similar issues?

Back to Mohin, who, prior to doing sustainability in the private sector, worked in both the legislative and executive branches of the U.S. federal government (you can watch his testimony on ESG legislation to the House Finance Committee here).

"The SEC proposal to require climate disclosure is long overdue and extremely welcome," he told me. "This rule represents an inflection point — the paradigm of voluntary reporting of ESG information is morphing into a regulatory regime."

A welcome regime change, but what about the consequences on companies? "The new rule will require climate information to be structured and audited — like a detailed fact-check — and integrated into financial filings," Mohin said.

So, could some of the grandiose or misleading ESG claims that have previously been made in fund prospectuses and marketing materials trigger mis-selling claims? "Inconsistency, omissions, lack of clarity — that’s prime territory for mis-selling claims," Fiona Huntriss, a partner at law firm Pallas Partners, told the FT.

The threat of investigations into accounting fraud are, in my estimation, a large and sharpened log to compel real ESG ambition and action compared to the softer stick of public pressure, advocacy and shaming.

A good crisis going to waste?

Mindy Lubber, president and CEO at Ceres, which runs a sustainable investor network, shared a revealing poll with me on climate disclosure regulation. Sponsored by Ceres and Public Citizen, the poll found that 87 percent of Americans are in favor of companies reporting their climate-related risks.

The gulf between congressional action and Americans’ sentiments across party lines is not new, but the support to mandate climate disclosure for publicly traded companies is uncharacteristically high: 97 percent of Democrats, 87 percent of Independents and 74 percent of Republicans.

With such universal agreement across the political spectrum, why is conservative GOP leadership — purportedly speaking from a party consensus — decrying mandatory climate disclosure as overreach?

No surprises here: The oil and gas industry is deeply interwoven in the GOP political machine and, like any good industry leaders, they aren’t letting a good crisis go to waste.

As the WSJ reported, a group of GOP senators from the Senate Banking Committee is putting pressure on the Biden administration to put climate disclosure regulations on the backburner given Russia’s invasion of Ukraine.

In a letter to Treasury Secretary Janet Yellen, the GOP group highlighted concerns that climate policies — especially mandated disclosure for public companies — could limit access to capital for U.S. energy firms, ostensibly leaving the U.S. more vulnerable to foreign suppliers.

Nevertheless, Lubber said Ceres is "[h]opeful the forthcoming rule will be strong … A corporate climate risk disclosure mandate will go a long way in protecting investors, as well as the health of our communities and economy."

Here’s hoping.

SEC, meet EPA

Financial regulations are meant to foster trust, ensure stability and protect investors. And the SEC has one job — to protect investors.

Information on climate risk is essential to fulfill this mission, as Commissioner Allison Herren Lee said in 2021: "Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. [W]e understand these issues are key to investors — and therefore key to our core mission."

But as Jean Rogers, SASB founder and now global head of ESG at Blackstone, reminded me, "It’s important for investors to remember that in the United States, we have an EPA and their remit is environmental protection. The SEC’s remit is investor protection. The two are intertwined when it comes to climate risk."

Rogers sees a need from the SEC to have the EPA develop science-based targets, and transition pathways by sector to meet a 1.5 scenario, and that they need this to "evaluate the adequacy and materiality of the climate disclosures companies make."

The EPA could be doing more on this front, such as aggregating required climate reporting data by entity rather than facility, thus making it more accessible to investors, ultimately using their authority to establish limits on emissions.

As with most things tackling climate — in the private and public sectors alike — it’s an all-of-the-above, all-hands-on-deck approach. Or … well, read the IPCC report.