Allison Herren Lee Addresses the SEC’s Mandatory Climate Risk Disclosures Proposal

Former SEC commissioner Allison Herren Lee highlighted the interplay of capital markets and clear climate reporting as a remote guest speaker for the Dyson School’s Climate Finance course.

By Yuktha Bhadane, MS ’25

Climate Finance class virtual guest speaker Allison Herren Lee, former member and acting chair of the U.S. Securities and Exchange Commission, underscored the importance of companies communicating climate risks to their investors as the global shift toward clean energy gains momentum. Lee addressed students at the Charles H. Dyson School of Applied Economics and Policy via Zoom at the invitation of Alissa Kleinnijenhuis, visiting assistant professor of finance at the Cornell SC Johnson College of Business, who created the school’s inaugural Climate Finance course.

In response to the Inflation Reduction Act of 2022, signed into law by President Joe Biden, industry leaders unveiled about $110 billion in new clean energy manufacturing ventures over the subsequent year. Within a year after the IRA was signed into law, project developers planned investments worth at least $122 billion across more than 800 clean energy generation projects. These strides in green investments mark climate finance’s crucial place in America’s sustainable growth.

Investors need to understand the reasoning and projected benefits behind these investments. Drawing parallels to the 2008 financial crisis, Lee highlighted the dangers of disorderly transitions. “When investment risks in capital markets are not transparent, we can see chaotic reordering and repricing as external events occur that reveal those hidden risks,” said Lee, who is now an adjunct professor and senior research fellow at the New York University School of Law and of counsel at Kohn, Kohn & Colapinto. The 2008 crisis, driven by the obscured value of certain derivatives, stands as a stark reminder of the importance of transparent disclosure, especially concerning climate-related matters.

While capital markets are pivotal for innovation and policy influence, Lee pointed out their inherent limitations. “They can’t mandate an energy transition like governments can,” she remarked. Even with strides made through voluntary approaches, such as the Task Force on Climate-Related Financial Disclosures (TCFD), there’s a ceiling to their potential impact. Lee explained that there is “a unique position for governments to align capital and market incentives in the direction they believe is necessary. Regulators, like the SEC, can help bring transparency and accountability to how those incentives operate.” The SEC’s March 2022 proposal to make disclosing material climate risks mandatory (announced during Lee’s tenure as Commissioner) is significant in this context.

Activism over divestment

Andrew Shapiro, a Dyson School senior, asked whether it was better to retain or divest stocks like Exxon Mobil to advocate for a greener transition. In response, Lee noted the effectiveness of voice over exit, citing the case of the hedge fund, Engine No. 1, which successfully installed three climate-conscious directors on Exxon’s board. “On balance, I believe that divestment, at least at this point, is not the best solution,” Lee said. “Instead, staying involved and attempting to drive change from within is often more effective.”

Lee underscored the pivotal role of regulators in ensuring consistent, comparable, and reliable data disclosure by companies. A regulator can mandate a non-negotiable demand for specific information. Beyond consistency, Lee emphasized that it is critical for investors to be able to compare disclosures as “apples to apples.” To further enhance the trustworthiness of these disclosures, Lee introduces the idea of third-party verification, drawing a parallel to the rigor of financial statement audits.

Decoding the SEC’s climate proposal

Following Lee’s discussion on the importance of consistent, comparable, and reliable climate risk disclosures, she elaborated on the SEC’s Proposal: The Enhancement and Standardization of Climate-Related Disclosures for Investors.  “The SEC is not in the business of telling companies how to deal with risk,” she emphasized, “but rather ensuring those risks, and sometimes their strategies for dealing with them, are disclosed to investors.” This proposal, deeply rooted in principles similar to the TCFD and the Greenhouse Gas Protocol, mandates companies to clearly communicate climate-related risks and also permits (but does not require) disclosure of climate-related opportunities. Further, it seeks clarity on how companies plan to address these risks and monitor them through governance structures. The proposal particularly underscores the financial impacts of climate change.

During the regulatory discussion, Kleinnijenhuis probed deeper, asking: “Is an executive’s primary goal just profit maximization, or does it encompass stakeholder welfare, like the duty to decarbonize?”

Lee responded: “Profit maximization and stakeholder welfare can coexist. Fiduciary duties are expansive and allow for a multitude of outcomes. Corporations have traditionally balanced profits with long-term strategies that consider various stakeholders. The guiding ‘north star’ remains profit, but it’s about how we define and navigate that profit journey while considering stakeholders.”

The challenges of Scope 3 disclosures

Pivoting back to specifics of the SEC’s proposed climate-related disclosures, Lee addressed a directive that is particularly anchored to the Greenhouse Gas (GHG) Protocol: Scope 1, 2, and 3 emissions, categories defined to help organizations understand and quantify their greenhouse gas emissions. Scope 1 emissions are direct emissions from owned or controlled sources, Scope 2 emissions are indirect emissions from purchased energy, and Scope 3 emissions are other indirect emissions in the value chain. “As proposed, Scope 3 disclosures have the longest timeline before they must be disclosed,” said Lee, “But omitting Scope 3 should not be an option because that is where roughly 75 percent of the emissions lie.”

When College of Agriculture and Life Sciences senior Daniel Greenstein asked about the added value versus the burden of disclosing Scope 3 emissions, Lee remarked, “We focus on scope 3 because that’s where the emissions are.” She acknowledged challenges but stood resolute on the importance of Scope 3’s inclusion. “Given our journey to this point, I’m cautious about expecting another rule in this area anytime soon. We may get only one bite at this apple, so it’s essential to include Scope 3, but with careful planning and accommodations to ease the transition,” said Lee.

Balancing reporting burdens with benefits

In light of California’s pair of bills, SB 253 and SB 261, signed into law on October 7, 2023, which introduced stringent GHG emissions disclosure mandates, Sarah Yum, a junior at the Dyson School studying finance and strategy, sought clarity on regulatory implications, asking: “How should we consider the reporting burden and what we ask of companies?”

In response, Lee underscored the importance of a balanced approach: “It’s vital for the SEC to ensure that the cost of adding any new disclosure is less than the benefits to be derived.” She went on to explain the SEC’s obligation, noting, “The SEC has to conduct a cost-benefit analysis every time it issues a rule, even if deregulatory.” Recognizing California’s role in this dynamic, Lee said, “The new California law has shifted this cost-benefit equation for the SEC. Many companies will already be required to make these disclosures under California law and this reduces the incremental costs of a final SEC rule. This weighing of costs and benefits is especially crucial because of potential arbitrage; public companies might shift high-emitting assets to the private sector to avoid disclosure. But the analysis is essential, and the SEC handles this process with care.”

Harmonizing international disclosures by building on common voluntary disclosure frameworks

Adam Abergel, a senior at the Dyson School, posed a question about the global nature of companies: “How would the SEC work with their international counterparts to ensure reliability, comparability, and consistency in disclosures?”

A key insight Lee shared is that the SEC could achieve greater harmony with other international climate disclosure rules if these all build on a common framework of voluntary disclosures, such as the TCFD. “This is a global issue requiring global cooperation and a global approach,” Lee explained. “It’s crucial for the SEC to understand and consider how these various approaches across regions need to be interoperable.” She cited various regional approaches, from the EU’s Corporate Sustainability Reporting Directive (CSRD) to the International Sustainability Standards Board (ISSB), and noted California’s emerging role.

“When we made the proposal in March of 2022, I believed we should leverage some of the work that’s been done voluntarily, like the TCFD and the GHG Protocol. Other international organizations can then focus on these collective efforts,” Lee continued. “This provides a foundation. We can agree, for instance, to adopt some form of TCFD—risk, governance, and strategy—and view greenhouse gas emissions through the lens of the GHG Protocol. Leveraging market-driven solutions is essential for international cooperation, not just because of the burden on companies but also because global investors need to be able to compare across jurisdictions. They need a consistent understanding of what’s happening in each region.”

Drawing on her 25-year tenure as a securities law practitioner, Lee emphasized the inevitable legal challenges arising from the SEC’s decisions, saying, “Whatever the SEC decides, lawsuits are imminent.” With a deep understanding of capital markets, she noted, “I’ve observed capital markets for 30 years, and consistently, they adapt to new regulations. Companies tend to not wait for litigation outcomes. Instead, they start preparing for compliance.”

Lee’s insights offered students a rich, real-world perspective, reinforcing the intricate interplay of regulations, businesses, and legal proceedings.

Yuktha Bhadane is a class of 2025 Masters of Science student in the Charles H. Dyson School of Applied Economics and Management.