The Securities and Exchange Commission (SEC) has a threefold mission: (1) protecting investors, (2) facilitating capital formation, and (3) maintaining fair, orderly, and efficient markets. Central to all three is that companies provide information on financially material risk and opportunities to their investors. This is specifically noted with respect to protecting investors, saying: “public companies, fund and asset managers, investment professionals, and other market participants to regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest.”

I argue that disclosure by companies of material ESG factors according to a set of standards is essential for investor protection. But first, it is necessary to distinguish between values-based investing, which is not based on financial materiality, and value-based investing, which is. Material ESG risk factors are pecuniary and fiduciary duty requires that these be taken into account. Through engagement with their shareholders, companies must then determine which ESG factors are material, and these vary by industry. The SASB/ISSB provides useful guidance here.

Climate change is an existential challenge to America’s future prosperity and security. While it is typically portrayed in the media and in political messaging as a largely liberal priority, the challenges it presents are recognized by conservative executives, conservative politicians, conservative NGOs, conservative investors, and fossil fuel companies alike. The SEC has the statutory authority to issue a rule on climate risk disclosure, as the issue is material to investors, although I detail some suggestions for how the rule can be simplified and improved so as not to exceed the SEC’s statutory authority.

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