Paul Theis
Reports of the imminent demise of the environmental, social and governance (ESG) movement have been grossly exaggerated.
While some sustainability-minded companies and Wall Street firms have recently adopted lower ESG profiles due to public backlash, this has largely been a tactical retreat until governments provide air cover. Financial regulators are now coming to the rescue, passing rules to make the entire climate-focused ESG system mandatory and prescriptive.
In March 2024, the U.S. Securities and Exchange Commission (SEC) issued final climate disclosure rules requiring every major U.S. company to report in detail all climate-related physical and transition risks faced by its business, as well as the size of its carbon footprint.
The SEC’s new rules will reinforce the climate change narrative by forcing the management of all reporting companies to act as meteorologists and disclose the impact of every imaginable weather condition on their businesses over extremely long investment horizons. They will also highlight the significant regulatory, litigation, contingent liabilities and reputational risks faced by traditional energy industries due to government climate policies, thereby discouraging investment in traditional energy industries.
However, instead of reducing risks in financial markets by improving disclosure to investors, as the SEC had promised, the agency's new rules would have the opposite effect. By subjecting all issuing and investment firms (essentially every financial market participant in the United States) to climate testing, the SEC aims to both stigmatize the carbon-emitting industry in general and direct capital flows in particular. Help drive the clean energy transition by shifting away from fossil fuels.
The SEC’s climate disclosure rule is part of the federal government’s coordinated climate plan and is the latest step in a sweeping regulatory assault on the oil and gas industry since President Joe Biden took office. Defunding oil, gas and coal companies is arguably one of the most effective ways to reduce domestic hydrocarbon supplies and reduce the nation’s emissions.
The SEC’s rules will now instigate and accelerate decarbonization, a real threat to the U.S. economy and U.S. financial markets. If the current administration succeeds in achieving its goal of reducing net U.S. greenhouse gas emissions by 50% to 52% from a 2005 baseline by 2030 (to achieve net-zero emissions by 2050), the macroeconomic impact will certainly be negative.
First, it would constrain the U.S. economy competitively while doing nothing to address the so-called global climate change problem, since most developing countries—particularly China and India—do not play by the same climate rules. Despite reports to the contrary, the global energy transition is not currently underway. Since 1990, when the United Nations first began warning the world about the dangers of man-made global warming, annual global greenhouse gas emissions have increased by more than 50%, largely due to the continued use of fossil fuels (especially coal) in developing countries.
America’s growing reliance on intermittent wind and solar power, combined with a push to electrify entire new economic sectors, starting with transportation, will put stress and instability on the U.S. grid and raise electricity prices across the board.
Limiting domestic fossil fuel production would lead to higher oil and natural gas prices, which would affect the entire U.S. economy and raise the cost of nearly all goods, especially food. Regulatory mandates to reduce the scale of the domestic oil and gas industry will also lead to the loss of a large number of jobs and shrinking GDP in the United States, while the failure of U.S. energy independence will intensify the national security risks of the United States.
Germany’s recent economic woes illustrate what the United States will face if the Biden administration continues on its current climate policy path. Since the launch of the 2050 Climate Action Plan in 2016, Germany, Europe's largest economy, has transformed from the EU's growth engine into the “sick man of Europe”, with mismanagement of climate-driven energy policies leading to a downward economic spiral. and degrowth.
There is no evidence that economic growth can be decoupled from emissions or fossil fuels. The current decade of aggressive emissions reductions will lead to a U.S. recession in 2030, characterized by weak growth, rising inflation, rising unemployment, and a hollowing out of the domestic industrial base. It's hard to see how such a macroeconomic backdrop would have any constructive impact on Wall Street or Main Street.
By definition, decarbonized financial markets will be more volatile, riskier and less diversified, leaving investors with fewer investment options. With energy-consuming industrial, utility and technology companies accounting for the largest shares in most benchmark U.S. stock and bond indexes, this will amplify the market's exposure to energy price swings. The average credit quality of U.S. companies, especially in energy and other heavy industries, is also likely to trend downward by the end of the century, with bankruptcies and debt defaults rising. By 2030, the U.S. financial market may look more like that of an emerging country than that of a developed country.
The SEC has currently suspended enforcement of its climate disclosure rules pending the resolution of various lawsuits challenging the rulemaking on the grounds that it exceeds the agency's statutory authority. Issuing a climate disclosure rule as a backdoor means of changing the U.S. energy mix and restructuring the overall economy appears to go well beyond the SEC’s role as the top policeman of U.S. financial markets.
Most alarmingly, under these climate disclosure rules, the SEC will no longer be an objective market referee, at least when it comes to the ESG factors of climate change. The SEC will now become an active partisan player in the Biden administration’s push to decarbonize the U.S. economy, in direct violation of its regulatory mandate to remain impartial and ensure full disclosure and fair dealing in well-functioning financial markets. By mandating the integration of climate considerations into corporate policies and investment risk management, the agency will replace the governance roles of corporate executives, bank credit officers and portfolio managers.
By attempting to achieve specific market outcomes based on emissions litmus tests, the SEC will also pick corporate winners and losers and influence asset pricing and financial market access by shifting the playing field away from traditional energy and other high-carbon emitting industries. This is an inversion (if not a misinterpretation) of the SEC's regulatory functions.
Paul Theis is a senior fellow at the National Center for Energy Analysis and the author of the new report, “SEC Climate Rules Will Wreak havoc on U.S. Financial Markets.”
This article was originally published by RealClearEnergy and provided via RealClearWire.
Relevant
