Credit: Louisa Svensson
“This is fine,” federal regulators exclaimed, as the proverbial climate house continues to burn. As the United States continues to feel the devastating effects of climate change, from wildfires to hurricanes, the Securities Exchange Commission (“SEC”) has removed a key arrow from its climate regulatory quiver this past year. In March of 2021, the SEC created the Climate and Environmental, Social, and Governance Task Force (“Task Force”) as part of its Division of Enforcement. By mid-2024, however, the Task Force was disbanded, raising concerns about the future of corporate accountability for environmental commitments in a tech-driven market. As tech giants such as Alphabet, Meta, and Apple continue to invest heavily in artificial intelligence (“AI”), the environmental impacts of this rapid development are becoming increasingly concerning. In the absence of the Task Force, or a regulatory arm akin to it, the ability to address greenwashing amid the rise of AI is now an open question.
What is ESG and who holds these companies accountable?
Environmental, Social, and Governance, otherwise known as ESG, is an umbrella term used in corporate governance that provides potential investors with insight into a company’s sustainable practices, policies, and broader impact. The ESG’s three categories are each independently analyzed, ultimately giving the company in question a total ESG score.
Environmental: This factor evaluates a company’s impact on the environment, including climate policies, energy utilization, waste, overall pollution impact, conservation of natural resources, and treatment of animals. At its core, the theory behind the Environmental factor is that adverse climate effects and events pose risks for stakeholders. Therefore, a company that can mitigate these effects and prepare for climate change will be better positioned for long-term market success.
Social: The Social pillar analyzes a company’s engagement with its community, such as charitable donations and volunteer efforts. Additional considerations include the implementation of workplace conditions that reflect a strong commitment to employee health and safety.
Governmental: Pertinently to SEC purposes, the Governance factor is meant to ensure that companies are transparent in their accounting methods, avoid conflict of interest, and generally adhere to a higher level of accountability.
As ESG as an investment principle has risen in popularity, so have associated issues. Notably, greenwashing is sometimes associated with ESG and is a term used to describe deceptive marketing of products or policies to appear more environmentally friendly. As greenwashing has become more publicly known and condemned, there has been a global push for standardized and stricter regulations.
The Rise and Fall of the SEC’s ESG Task Force
The SEC’s establishment of the Climate and ESG Task Force in 2021 was hailed as a significant step towards regulating corporate standards and setting ESG disclosure requirements. The Task Force aimed to identify conduct, such as material misrepresentations or omissions regarding climate disclosures to investors and the public, and charge it as “greenwashing.” However, what once appeared to be a momentous triumph for climate activists is now just a blip in SEC history.
Amid industry backlash, the SEC dissolved its recently established task force just three years after its inception. Although, the SEC has not entirely abandoned its focus on climate and ESG-related issues. For instance, the “Names Rule” was adopted to prevent misleading ESG-focused labeling, and new rules on enhanced ESG disclosures remain in the pipeline. Additionally, the Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices rule remains on the SEC’s agenda and is in the final rule stage. Yet, the voluntary stay of specific climate rules due to litigation, such as Enhancement and Standardization of Climate-Related Disclosures for Investors, reflects the ongoing tension between regulatory ambition and industry resistance.
This paradoxical dichotomy of advancing climate-related rules while eliminating the enforcement body has left the industry in limbo. The uncertainty of how strictly the SEC will enforce these new rules or whether future ESG rules will be adopted has resulted in industry apprehension regarding future ESG obligations.
The AI Boom and Its Environmental Impact
At the same time, many tech giants have acknowledged the public’s interest in climate conservation and made bold pledges to advance its conservation efforts moving forward. Meta, Google, Microsoft, and Amazon pledged to become “water positive” by 2030. As companies race to dominate AI development, its climate commitments have come under increasing scrutiny. It is unclear if these pledges will be achievable, especially with the onset of AI rollouts.
The race for AI development is driving full speed ahead without consideration of its conflict with ESG commitments. AI models, LLM models, and the like require significant computational power, leading to increased energy consumption and water usage to cool down data processing centers. According to a University of California, Riverside and University of Texas, Arlington research study, it takes approximately 700,000 liters of clean freshwater for U.S. data centers to power the training of Microsoft’s newest AI model. Researchers calculate that this amount of water “could be used to produce 370 BMW cars or 320 Tesla electric vehicles.” Similarly, AI’s substantial carbon footprint remains difficult to quantify, particularly when considering the energy used for training models and daily search queries. Scientists at Cornell University determined that training LLMs “consumed an amount of electricity equivalent to 500 metric tons of carbon, which amounts to 1.1 million pounds.” These figures indicate that as tech companies continue to develop AI systems, the environmental impacts will intensify, potentially jeopardizing its climate pledges.
Regulatory Uncertainty in the Wake of the Task Force Disbandment
The disbandment of the SEC’s ESG Task Force raises pressing questions about how AI-driven industries will be regulated for its environmental impact. Will the SEC continue to enforce climate misstatements with the same rigor? What penalties will companies face if it fails to meet its ESG commitments?
SEC officials, including Chairman Gary Gensler, have affirmed their commitment to enforcing climate-related disclosures and greenwashing cases despite the dissolution. For instance, ongoing litigation regarding the SEC’s climate disclosure rules has resulted not in a full halt but in a temporary stay. This indicates that climate misrepresentations remain a potential liability for corporations while the regulatory landscape is influx.
Moreover, companies that fail to align innovation with sustainability could face various consequences. First, it may face economic impacts. For example, environmentally-focused investors may pivot investments towards companies with climate pledges whose services comport with those goals. Second, companies would certainly face reputational harm, even though reputations can be short-lived in today’s fast-paced media cycle. As in most situations, the most pressing impact would be enforcement by the federal government.
As AI continues to grow in importance in the American economy, so does the need for regulating its impact on the environment. The SEC’s dismantling of the ESG Task Force has left uncertainty in the industry about the specific standards that corporations must meet to avoid unwanted penalties. Despite this uncertainty, the corporate sector remains obligated to disclose material and accurate information in compliance with SEC requirements. Whether the disclosures are climate-related or not, corporations are required to submit truthful statements, which will be subject to auditing. As the SEC continues to promulgate ESG regulations, a clearer picture will unfold regarding the future of ESG disclosure requirements.
*The views expressed in this article do not represent the views of Santa Clara University.
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