By Paul Tice
Reports of the death of the Environmental, Social, and Governance (ESG) movement have abounded.
While some sustainability-minded companies and Wall Street firms have recently adopted a lower ESG profile due to public backlash, this has generally been a tactical retreat until the government provides an air cover. Financial regulators are now riding to the rescue, passing rules that make all climate-focused ESG systems mandatory and prescriptive.
In March 2024, the Securities and Exchange Commission (SEC) published its final climate disclosure rules that require every large US company to report in detail all the physical and transition risks related to climate that the business faces, as well as the size of its carbon footprint.
The new SEC rules will force the management of all reporting companies to act as meteorologists and disclose all conceivable weather impacts on their business over a very long investment horizon, thus reinforcing the climate change narrative. He will also reduce investment in the traditional energy sector by highlighting the regulatory, litigation, contingent liability, and reputational risks the industry currently faces due to government climate policies.
However, instead of de-risking financial markets by increasing disclosure to investors as promised by the SEC, the agency’s new rules will have the opposite effect. By applying a climate test to all companies that issue and invest – basically, every financial market participant in the US – the SEC’s goal is to help force a clean energy transition by stigmatizing carbon-emitting industries in general and specifically directing capital flows away from fossil fuels . producer.
The SEC’s climate disclosure rules are part of the federal government’s coordinated climate plan and the latest piece in a sweeping regulatory assault on the oil and gas industry since President Biden took office. Unfunded oil, gas, and coal companies may be one of the most effective ways to reduce domestic hydrocarbon supplies and reduce national emissions.
Decarbonization, which the current SEC rules will abet and accelerate, is a real threat to the American economy and the US financial markets. If the current administration succeeds in its goal of reducing US net greenhouse gas emissions by 50%-52% by 2030 compared to the 2005 baseline – on the way to net zero emissions by 2050 – the macroeconomic impact will be negative.
For starters, it would hurt the US economy competitively while doing nothing to solve the perceived problem of global climate change because most developing countries — especially China and India — don’t play by the same climate rules. Despite reports to the contrary, no global energy transition is currently underway. Since 1990, when the United Nations first began to warn the world about the dangers of man-made global warming, annual global greenhouse gas emissions have increased by more than 50%, mainly due to the continued use of fossil fuels (mainly coal) by expanding. country.
Increasing US reliance on intermittent wind and solar power plants while simultaneously electrifying new swaths of the entire economy—starting with transportation—will strain and destabilize the American electricity grid and increase electricity prices across the board.
Curbing domestic fossil fuel production would lead to higher oil and gas prices, which would feed the entire US economy and raise the cost of almost everything, especially food. Regulatory-forced reductions in the domestic oil and gas industry would also cause significant job losses and reduce US GDP, while failure to preserve America’s energy independence would increase national security risks for the country.
The recent German economic crash shows what will happen to the US if the Biden administration continues down its current climate policy path. Since launching its 2050 Climate Action Plan in 2016, Germany, Europe’s largest economy, has gone from the EU bloc’s growth engine to the “sick man of Europe” as climate-driven energy policy mismanagement has led to a downward spiral. deindustrialization and degrowth over the past decade.
There is no evidence that economic growth can be separated from emissions or fossil fuels. Aggressive emissions reductions over the current decade will result in a shrinking US economy by 2030, marked by anemic growth, higher inflation, increased unemployment, and an empty domestic industrial base. It is difficult to see how such a macroeconomic background will build for Wall Street or Main Street.
A decarbonized financial market will, by definition, be more volatile, riskier, and less diversified, with fewer investment options available to investors. Since energy-using industrial, utility, and technology companies make up the largest portion of U.S. stock and bond indexes, this will increase the market’s exposure to fluctuating energy prices. The average quality of US corporate credit—especially for energy and other heavy industries—also tended to decline toward the end of the decade, with bankruptcies and debt default rates rising higher. By 2030, the US may resemble developing country financial markets more than developed ones.
The SEC is currently staying the enforcement of the climate disclosure rule pending the resolution of multiple lawsuits challenging the rule on the grounds that it exceeds the agency’s statutory authority. Issuing climate disclosure rules as a backdoor means of changing the US energy mix and restructuring the overall economy would seem to extend beyond the SEC’s role as the top policeman for US financial markets.
Most egregiously, with this climate disclosure rule, the SEC will no longer be an objective market arbiter, at least when it comes to the ESG factors of climate change. The SEC will now be an active partisan player in the Biden administration’s drive to decarbonize the US economy, in direct violation of the regulatory mandate to remain impartial and only ensure full disclosure and fair transactions in a well-functioning financial market. By mandating the integration of climate factors into corporate policy and investment risk management, the agency will replace the roles of corporate executive management, bank credit officers, and investment portfolio managers.
By trying to achieve certain market outcomes based on emissions litmus tests, the SEC will also choose corporate winners and losers and affect asset prices and access to financial markets by tilting the field away from traditional energy and other high carbon emitting sectors, which is an inversion—if not a perversion—of its function. SEC regulation.
Paul Tice is a senior fellow at the National Center for Energy Analysis and author of the new report “SEC’s Climate Rules Will Damage US Financial Markets.”
This article was originally published by RealClearEnergy and is available via RealClearWire.
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