By Rupert Darwall
“And when was the last time you saw your father?” -William Frederick Yeames, 1878
Scene: Room 2128 of the Rayburn Building Office Building at a House Financial Services Committee hearing on the SEC’s climate-related disclosure rules, April 10, 2024.
Representative Juan Vargas (D-CA): “How many believe in climate change?” Raise your right arm. “If you can please raise your hand.”
Chris Wright, founder, chairman and CEO of Liberty Energy, gesticulating: “That’s a bad question.”
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The Securities and Exchange Commission’s (SEC) 886-page climate disclosure document is the most controversial in its 90-year history. It has huge implications for every listed business, especially in the energy sector. The rule empowers climate activists by forcing companies to collect and disclose emissions data that their allies on Wall Street can use to enforce and monitor net zero goals in corporate America. Adopted on March 6, the rule was immediately challenged in court. Less than a month later, the SEC chose to keep the rules to pre-empt petitioners’ requests for an emergency stay pending judicial review.
When it was first proposed, the rule drew an unprecedented amount of comment. It was adopted over the disagreement of two Republican SEC commissioners. In his opinion, Commissioner Mark Uyeda recalled the advice given to investors: “Do not rely on marketing materials and read the prospectus.” The implications are devastating. In justifying these rules, the SEC did not meet the standard of fairness expected of regulated persons.
In a speech shortly after the adoption of the new rules, SEC chairman Gary Gensler observed, “Materiality represents the basic building blocks of disclosure requirements under federal law,” and went on to claim that the new role “is based on materiality.” This is bunk. As Commissioner Hester Peirce opined, “While the Commission has decorated the final rule with ribbons of materiality, the rule contains materiality only in name.” There is no context other than the climate, writes Commissioner Uyeda, whether the SEC requires companies to provide an explanation of any expenses up to one percent of pre-tax income, incurred for those incurred due to extreme weather.
In addition, the SEC has required the disclosure of material climate information and has issued detailed guidance to that effect in 2010. As a brief on behalf of the US Chamber of Commerce and Center for Public Policy Research (NCPPR) to the Eighth Circuit. is hearing the case, pointing out, “the rules are duplicative and worthless.” The rule, according to the brief, violates the Administrative Procedure Act because “it purports to resolve a ‘securities’ issue that the SEC has failed to demonstrate exists.” In violation of its own statute, the SEC failed to conduct a rigorous cost-benefit analysis of the proposal, which, in its own massaged estimate, will cost more than double (RD1) the cost of complying with all the main SEC disclosures there combined. The rule is so far removed from what the SEC proposed that the SEC erred in not re-proposing the rule and opening it up for comment, Commissioner Uyeda stressed.
The materiality standard adopted by the courts concerns whether there is a high probability that a reasonable investor would consider the information important in determining how to choose or make an investment decision. What unites the world of reasonable investors is the prospect of financial returns. This means there is an empirical test for materiality: Does the disclosure move the price of the security? A statistical study submitted to the SEC by Professor Daniel Taylor at The Wharton School analyzed the market impact of the disclosure of corporate greenhouse gas (GHG) emissions data. The study found “no evidence of statistically significant changes in stock prices or trading volume in response to GHG disclosures” (emphasis in original). However, as the US Chambers/NCPPR brief notes, “The Commission has clearly – and arbitrarily – failed to do so weigh The findings of Dr. Taylor” (emphasis in original).
The second class of disclosure is related to the integrity of the principal-agent relationship, that is, the reliance of dispersed shareholders on the good faith of the company’s executives to act only in the company’s interests. The purpose of such disclosures, for example regarding executive compensation, is to facilitate transparency and assure investors that executives are not involved in corporate looting. The integrity of the shareholder-management relationship is a factor that can have a major impact on company valuations and thus is of great interest to reasonable investors. As David McLean notes in “The Case for Shareholder Capitalism,” the reason why a barrel of oil in 2000 was worth $12 market capitalization in ExxonMobil and BP but only 20¢ for Russian oil companies is explained by very different standards of corporate governance. “U.S. stock exchanges and U.S. laws and regulatory agencies make it difficult and costly to take from shareholders,” McLean wrote.
In effect, the SEC subordinates materiality to investor demand. “Investors ranging from individual investors to large asset managers have demonstrated that they make decisions based on this information,” said Chairman Gensler. But it is not the role of the SEC to mandate the disclosure of company data in every investment fad or fashion, but it is also weak, thus imposing costs on all investors. One of the SEC’s “reasonable investors” in the rule’s text is As You Sow, a nonprofit shareholder advocacy group. As You Sow’s mission is “to promote environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies.” The website has a prominent donation button, and the two funders are the Soros-backed Foundation for the Promotion of Open Society and the Open Society Foundations.
The SEC’s implicit categorization of climate activists As You Sow as “reasonable investors” demonstrates the veracity of Commissioner Uyeda’s claim that SEC rules are “climate regulations promulgated under the seal of the Commission.” As the US Chambers / NCPPR brief stated, the alleged SEC justified the rule “pretextually”, that is, not the real reason, which, as I said in the comment letter of June 2022, was the reason of the Supreme Court. complete the proposed citizenship question in the 2020 census.
Until climate-related disclosure rules were proposed, the SEC had viewed the purpose of disclosure as providing information to investors about a company’s financial condition. The rule sees the SEC’s unilateral expansion of information “necessary or appropriate in the public interest.” For Commissioner Uyeda, this raises the red flag of the doctrine of the main question. “The extraordinary grandeur of regulatory authority is rarely accomplished through ‘humble words,’ ‘vague terms,’ or ‘subtle device(s),” the Supreme Court stated in West Virginia v. EPA. By combining the disclosure objective of revealing the company’s financial situation with the disclosure that the SEC considers necessary for the public interest, the non-profit activist As You Sow – “Our vision is a safe, fair and sustainable world” – becomes, in the eyes of the SEC, “a reasonable investor. “
The SEC does a similar sleight of hand with the materiality touchstone. When proposed, the rules required listed companies to nominate directors responsible for managing and reporting on climate-related risks. The requirement was later dropped. Instead, the SEC forces boards to consider climate-related issues and then considers all board-level discussions to be material and therefore subject to disclosure. As a result, the SEC placed a bug in the boardroom of every listed company that activated when the words “climate” or “severe weather” were uttered. (Commissioner Uyeda notes that the SEC includes tornadoes as examples of “severe weather events,” although National Geographic says global warming may be reducing them — “the science is not clear yet.”)
At the apex of the legal challenge to the rule is the First Amendment. The US Chambers/NCPPR legal brief argues that the rule conflicts with the First Amendment, which prohibits “the government from telling people what to say,” as the Supreme Court said in 2006. controversial social debate. These freedoms, as previously ruled by the Supreme Court, “include the right to speak freely and the right to remain silent”.
Few issues are as controversial as climate change and what, if anything, to do about it. Before Representative Vargas tried to force Chris Wright to indicate what he believes in climate change, Wright testified about why Liberty Energy strenuously opposed the new rules, was challenged in court, and has sought a stay. The SEC is operating well outside of those lanes without a congressional mandate, Wright said.
Extrapolation of temperature trends derived from satellite measurements shows a two-degree Fahrenheit temperature increase by the end of the century. In contrast, Liberty Energy operates in minus 30°F in South Dakota and over 110°F in south Texas – some over 140°F. There is not much of a threat to our business from extreme weather, Wright testified. The real climate risk for Liberty comes from climate regulations that are expensive to comply with and invite litigation. With global demand for natural gas and oil at record highs and growing, the impact of the SEC rule will make it more expensive and riskier to produce oil and gas in the United States. That cannot be in the interest of America’s economy or national security. Much is at stake as the Eighth Circuit hears challenges to the SEC’s climate-related disclosure rules.
Rupert Darwall is a senior fellow of the RealClearFoundation and author of The Folly of Climate Leadership: Net Zero and the UK’s Disaster Energy Policy.
This article was originally published by RealClearEnergy and is available via RealClearWire.
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