Rupert Davor
“When was the last time you saw your father?” —William Frederick Yeames, 1878
Scene: On April 10, 2024, in Room 2128 of the Rayburn House Office Building, the House Financial Services Committee held a hearing on the SEC’s climate-related disclosure rules.
Rep. Juan Vargas (D-CA): “How many of you believe in climate change?” raised his right arm. “Raise your hand if you can.”
Chris Wright, founder, chairman and CEO of Free Energy, gestured: “This is a terrible problem.”
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The U.S. Securities and Exchange Commission's (SEC) 886-page climate disclosure document is the most controversial in its 90-year history. It has a huge impact on every public company, especially in the energy sector. The rule empowers climate activists by forcing companies to compile and disclose emissions data, which their allies on Wall Street can then use to enforce and monitor net-zero targets on U.S. businesses. The rule was adopted on March 6 and was immediately challenged in court. Less than a month later, the SEC chose to suspend the rule, preventing petitioners from seeking an emergency stay of judicial review.
When the rule was first proposed, it drew an unprecedented number of comments. The bill passed over the objections of two Republican SEC commissioners. In his strong dissent, Commissioner Mark Uyeda recalled the advice he gave investors: “Don't rely on marketing materials, but read the prospectus.” The implications were devastating. In justifying the rule, the SEC failed to meet the standard of honesty that its regulators rightly expect.
In a speech shortly after the new rules were adopted, SEC Chairman Gary Gensler noted that “materiality is a fundamental component of the disclosure requirements under federal law” and went on to claim that the new role “is based on materiality ”. This is nonsense. As Commissioner Hester Pierce said in her dissent, “While the Commission adorns the final rule with a substantive ribbon, the rule contains substantive content only in name.” In addition to climate concerns, Commissioner Ujeda wrote In addition, the SEC requires companies to provide an explanation for any expenses within 1% of pretax income, while it does so for expenses related to extreme weather.
In addition, the U.S. Securities and Exchange Commission (SEC) already requires the disclosure of material climate information and issued detailed guidance in this regard in 2010.Discussing the case, he noted that “the rule is necessarily duplicative and of no value.” The brief said the rule violated the Administrative Procedure Act because “it was designed to address a 'security' that the SEC failed to demonstrate existed.” Problem.” The SEC violated its own regulations by failing to conduct a rigorous cost-benefit analysis of its proposal, which would more than double the cost according to its own doctored estimates.[RD1] Compliance costs for all major existing SEC disclosures combined. Commissioner Ujeda believes that the rule is far removed from what the SEC originally proposed and that the SEC made a mistake by not reproposing the rule and publicly soliciting comments.
The materiality standard used by courts involves whether there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision. What unites all rational investors is the prospect of financial returns. This means that an empirical test of materiality is needed: Is the disclosure likely to affect the price of the security? A statistical study submitted to the SEC by Wharton Professor Daniel Taylor analyzed the market impact of companies disclosing greenhouse gas (GHG) emission data. The study found “no evidence of statistically significant changes in stock prices or trading volumes in response to greenhouse gas revelations” (emphasis in original). But, as the U.S. Chamber of Commerce/NCPPR brief notes, “the Commission inexplicably, arbitrarily, and even failed to consider Dr. Taylor's discovery” (emphasis in original).
The second type of revelation relates to the integrity of the principal-agent relationship, that is, the reliance of dispersed shareholders on the integrity of corporate executives to act solely in the interests of the company. The purpose of such revelations, such as executive pay, is to increase transparency and reassure investors that executives are not engaging in corporate predation. The integrity of the shareholder-management relationship is a factor that has a huge impact on a company's valuation and is therefore of great interest to rational investors. As David McLean points out in The Case for Shareholder Capitalism, in 2000 ExxonMobil and BP had a market capitalization of $12 a barrel of oil, while Rosneft’s market capitalization was only $20 cents, because corporate governance standards are very different. “U.S. stock exchanges and U.S. legal and regulatory agencies make expropriation from shareholders difficult and costly,” McLean wrote.
In effect, the SEC subordinates materiality to investor needs. “Investors from individual investors to large asset managers say they are making decisions based on this information,” Chairman Gensler said. But it is not the SEC's job to impose costs on all investors by mandating the disclosure of company data in order to follow every investment trend or fad, regardless of its basis. One of the SEC's most cited “reasonable investors” in rule text is As You Sow, a nonprofit shareholder advocacy group. As You Sow's mission is “to advance environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies.” Its website has a prominent donate button, and two of its funders are Soros-backed Advancing Open Society Foundations and Open Society Foundations.
The SEC’s implicit classification of climate activist As You Sow as a “reasonable investor” vindicates Commissioner Ujeda’s assertion that the SEC’s rules are “promulgated under the seal of the Commission” climate regulations”. As stated in the U.S. Chamber/NCPPR brief, the SEC’s purported reasons for the rule are “pretexts,” that is, not real reasons, and as I noted in my June 2022 comment letter, this was the Supreme Court’s Reasons to reject citizenship question from 2020 census.
Before proposing the climate-related disclosure rule, the SEC had viewed the purpose of disclosure as providing information to investors about a company's financial condition. The rule considers that the SEC's authority will be significantly expanded unilaterally to information “necessary or appropriate in the public interest.” For Commissioner Ueda, this raised a red flag about the principle of major issues. “Special authorizations from regulators are rarely achieved through ‘modest words’, ‘vague terminology’ or ‘subtle maneuvers’.[s]”, the Supreme Court stated in West Virginia v. EPA. Precisely by conflating the purpose of disclosing a company's financial condition with the disclosures the SEC deems necessary in the public interest, nonprofit activist As You Sow – “Our vision is a safe, just and sustainable world” – become a “reasonable investor” in the eyes of the SEC.
The U.S. Securities and Exchange Commission has pulled a similar trick on the substance litmus test. The rule, when proposed, would require public companies to nominate a director responsible for managing and reporting on climate-related risks. The request was subsequently dropped. Instead, the SEC pressures boards to consider climate-related issues and then deems all such board-level discussions important enough to disclose. In fact, the Securities and Exchange Commission has a bug in the boardroom of every public company that is activated whenever “climate” or “severe weather” is mentioned. (Commissioner Oueda noted that the SEC classifies tornadoes as an example of a “severe weather event,” even though National Geographic says global warming may well suppress tornadoes — “the science is not clear yet.”)
The biggest legal challenge to the rule is the First Amendment. The U.S. Chamber of Commerce/NCPPR legal brief argued that the rule violated the First Amendment, which prohibits “the government from telling people what they have to say,” as the Supreme Court said in 2006. Making costly statements against one's will on issues of social debate. The Supreme Court previously ruled that this freedom “includes the right to speak freely and the right not to speak at all.”
Few issues are as controversial as climate change and, if ever, what to do about it. Before Rep. Vargas tried to force Chris Wright to say whether he believed in climate change, Wright testified about why Liberty Energy vigorously opposed the new rules, challenged them in court and sought a stay of enforcement. Wright said the SEC is venturing out of its own lane without any congressional authorization.
Temperature trends extrapolated from satellite measurements predict temperatures will rise two degrees Fahrenheit by the end of the century. By comparison, Liberty Energy operates at -30°F in South Dakota and over 110°F in south Texas, with temperatures ranging over 140°F. Wright testified that there is no apparent growing threat from extreme weather to our operations. The real climate risk to Liberty comes from the high costs of complying with climate regulations and triggering litigation. As global demand for natural gas and oil reaches record highs and continues to grow, the impact of the SEC rules will be to make the production of U.S. oil and natural gas more expensive and riskier. This is not in the economic or national security interests of the United States. A lot is at stake as the Eighth Circuit hears arguments against the SEC's climate-related disclosure rules.
Rupert Darwall is a senior fellow at RealClearFoundation and author of The Folly of Climate Leadership: Net Zero Emissions and Britain’s Disastrous Energy Policy.
This article was originally published by RealClearEnergy and provided via RealClearWire.
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