Author: Stone Washington
July 23, 2024
The Securities and Exchange Commission’s (SEC) climate disclosure rules create real problems for public companies. The SEC's mission is to promote capital formation and maintain market efficiency, but for the first time in its 90-year history, the SEC is injecting a political risk element into its traditional principles-based disclosure framework.
The new rules come after the U.S. Securities and Exchange Commission bowed to pressure from left-wing special interest groups to impose environmental disclosures on public companies for the first time. If the court allows the SEC's final rule to go into effect, it will be a financial disaster for the public markets.
My latest policy report lays out the many losses U.S. companies will suffer under the SEC’s climate rules. The report was released on the same day that the RealClear Foundation hosted the 2024 Energy Future Forum, where the SEC’s excessive intervention in climate policy became a focus of debate.
The climate rule will require most large and mid-sized public companies to report annual and quarterly disclosures that cover a myriad of climate risk factors. This means approximately 3,488 companies spent more than $628 million in direct disclosure costs and millions more in indirect costs.
As a result, companies will need to spend significant resources hiring climate scientists, ESG experts, lawyers, and accountants to prepare for appropriate disclosures for SEC review, ignoring the time that would normally be spent on increasing their market value.
Corporate boards would lose much of their discretion and be forced to prioritize environmental risk factors over purely financial concerns. Instead, corporate boards must inject speculative climate science to determine which climate risks merit inclusion in SEC disclosures.
As the SEC launches 12 new categories of climate disclosures, investors will be presented with a deluge of confusing and potentially conflicting environmental data. This will impair investors' ability to respond to actual meaningful risks in the market or assess the health of a company. Doom and gloom about climate risks will jeopardize smart financial analysis.
But now, the SEC has found itself in a hostile legal environment, facing multiple lawsuits from disgruntled groups and concerned investors seeking to block the rule's implementation. As many as 25 state attorneys general have filed two lawsuits against the SEC, accusing the SEC of exceeding its statutory authority and violating the material issues doctrine by enacting climate regulations.
The Multidistrict Litigation Judicial Panel selected the Eighth Circuit Court of Appeals to consolidate the nine challenges into a single case against the SEC. Soon after, the SEC halted enforcement of the rule in response to its legal challenge.
The U.S. Securities and Exchange Commission (SEC) is in the awkward position of trying to defend something that is indefensible.
The SEC lacks any legislative authority to enforce its climate disclosure rules. In 1976, the SEC minimally updated corporate disclosure requirements to reflect new environmental laws, such as the National Environmental Policy Act of 1969 (NEPA). This allows companies to comply with NEPA standards and report administrative expenses in their annual filings with the SEC.
This stands in stark contrast to today’s climate rules, which are implemented without due regard for the democratic will of Congress.
Supporters of the climate rule rely on a loose interpretation of Section 12 of the Securities Act of 1934 and Section 7 of the Securities Act of 1933, mistakenly believing that Congress has given it broad authority to set disclosure standards.
The RealClearFoundation's Forum on the Near Future of Energy challenges the financial instability and investor harm caused by ESG revelations from the SEC and others.
At a “Capital (Mis)Allocation” conference attended by 1PointSix Chairman and CEO Terrence Keeley (see the video linked at the top for his segment), he raised the issue of how the SEC's rules are clearly a backdoor environmental activity. Mandatory climate disclosure represents an undemocratic form of ESG decision-making that neither Congress nor American voters have actually approved.
“Society needs to make a lot of decisions about the environment. These things need to be made democratically,” Keeley said, “not by some self-appointed elite on the Securities and ‘Emissions’ Board. [manner] We must take action against Scope 3 emissions. This is not the way to make decisions. Unfortunately, this will ultimately lead to resource scarcity, energy independence and reduced energy cleanliness.
In response to the SEC’s notion that it serves investors’ best interests by forcing companies to disclose their climate risks, Keeley mentioned that most ESG funds’ disclosures do not justify their purposes or meet their environmental impact. SEC rules do nothing to correct the lack of positive environmental impact of ESG funds or ESG-oriented companies.
“None of them [ESG funds] Make any impactful statement,” Kiley asserted. “All it had to do was beat the MSCI index, which itself was created to further the ESG industry complex. And it failed to achieve its goal.
Keeley and I both made it clear that the SEC's rules would artificially inject environmental awareness into corporate boardroom decisions. This reduces their discretion to conduct appropriate risk management for the company.
In addition, greenhouse gas revelations will provide climate activists with ample information ammunition, which they will use to “force them to adopt costly decarbonization targets,” Keeley explained.
The SEC’s finalized climate disclosure rule represents the greatest regulatory damage to corporate freedom in the agency’s history. If the rule survives litigation or congressional intervention, many investors will suffer lower returns and higher prices for goods and services. The last thing investors need is costly climate disclosure spam masquerading as corporate transparency.
Stone Washington is a fellow at the Competitive Enterprise Institute.
This article was originally published by RealClearEnergy and provided via RealClearWire.
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