With the imminent danger posed by climate change, governments and people who care about preserving the environment seek solutions to the most pressing issue of a generation. Market instruments can provide an  efficient way to affect positive change. But the economic tools used to solve environmental problems come with their own host of complications.

Climate change affects normal business functions, like the supply chain or access to energy. It also poses risks for individuals counting on investments to help pay for college or their retirement years. People’s retirement funds or college savings accounts could be at risk if the companies they are invested in are exposed to risks from climate change.

But companies are not held accountable for their exposure to climate change, making it difficult for investors to assess those risks. New SEC disclosure rules proposed in March of 2022 seek to address this oversight by requiring companies to report their exposure to “climate-related risks” and report greenhouse gas emissions, which may impact their business activities.

The carbon disclosure rules remedy a fundamental issue with corporate sustainability practices: many emissions evaluation techniques are inadequately supervised. For example, accreditation groups verify the validity of economic tools like carbon offsets and ESG ratings but consistently misrepresent the environmental effectiveness of such measures, and are not regulated themselves.

ESG analysis measures the ethical standards companies meet, and has exploded in popularity in the last 20 years as a way to measure corporate environmental performance. But ESG ratings are actually based on a company’s exposure to risks, like climate change, not their propensity for environmentally friendly, or even ethical, business practices. Thus, companies like McDonalds can perform terribly from an environmental sense and still receive a relatively positive ESG rating.

Carbon offsets are another common tool companies use to meet emissions reductions targets. The permits can misrepresent supposedly environmentally friendly action. Verra, a nonprofit that administers carbon offset standards, consistently overestimated the risk to forests that allowed the forests to count as carbon offsets. Verra isn’t alone in profiting from faulty practices.  The Nature Conservancy and the Massachusetts Audubon Society have also “protected” forests that are already safe.

Though ESG ratings and carbon offsets suffer from a lack of regulation, the SEC rules aim to  address this key deficit. As a government agency, the SEC has the responsibility to provide centralized, honest regulation to a sector of the economy that remains relatively unrestricted.

The response from large corporations to the proposed SEC rules has been overwhelmingly negative. They are concerned about the cost of performing the analysis for reporting and the legality of mandating disclosure of privileged information. These points have been the main source of contention for companies. But carbon disclosures are essential to informing shareholders of relevant risk. While considerable roadblocks remain, like political opposition in Congress, the proposed rule is slated to become operational in 2023.

Success is slow going, and climate change is ongoing. Time is the biggest barrier to companies changing, but time is also running out. Society needs to provide real, constructive solutions to global warming. The benefit of top down regulation is once the rules go into effect, the policy becomes functional immediately. At the moment, the SEC rules provide the best option for addressing climate change right now, maximizing time and effect.