By Stone Washington
July 23, 2024
The Securities and Exchange Commission’s (SEC) climate disclosure rules pose real problems for public companies. The SEC’s mission is to facilitate capital formation and maintain market efficiency, but for the first time in its 90-year history, the SEC has injected political risk factors into its traditional principles-based disclosure framework.
Leading up to the new rule, the SEC buckled under pressure from left-wing special interests to impose its first environmental disclosure mandate on public companies. If the SEC’s final rule is allowed to be enforced by the courts, it will be a financial disaster for the public markets.
My latest policy report describes the many ways US companies will suffer under the SEC’s climate rules. The report was published the same day the RealClearFoundation hosted the 2024 Energy Future Forum, where the SEC’s overreach on climate policy was a point of contention.
Climate rules require most large and medium-sized public companies to report annual and quarterly disclosures that address various climate risk factors. This translates to approximately 3,488 companies spending upwards of $628 million in direct disclosure costs and millions in indirect costs.
As a result, companies must use large resources to hire climate scientists, ESG experts, lawyers, and accountants to properly prepare disclosures for SEC review, neglecting time that would normally be spent improving market value.
Boards of companies will lose a lot of discretionary decision making, forced to prioritize environmental risk factors from purely financial concerns. In that place, corporate boards must apply speculative climate science to determine climate risks that warrant inclusion in SEC disclosures.
With 12 new climate disclosure categories from the SEC, investors will be spammed with a flood of confusing and potentially contradictory environmental data. This will impair the ability of investors to navigate the real risks in the market or evaluate the health of the company. The doom and gloom of climate risk will jeopardize prudent financial analysis.
But now the SEC has run headlong into a hostile legal environment, facing various lawsuits from a host of disgruntled organizations and concerned investors seeking to prevent the implementation of its rules. A total of 25 state attorneys general have pursued two lawsuits against the SEC for exceeding its statutory authority and violating the primary question doctrine by promulgating climate regulations.
The Eighth Circuit Court of Appeals was selected by the Judicial Panel on Multidistrict Litigation to consolidate the nine challenges into one case against the SEC. Shortly after, the SEC stopped implanting the rules to resist legal challenges.
The SEC is in an unenviable position trying to defend the indefensible.
The SEC has no legislative authority to enforce climate disclosure rules. In 1976, the SEC provided minimum updates to corporate disclosure requirements to reflect new environmental laws like the National Environmental Policy Act (NEPA) of 1969. This allowed companies to comply with NEPA standards in annual SEC filings and reporting of executive expenditures.
This is in stark contrast to the current climate rules, which are being implemented with complete disregard for the democratic will of Congress.
Proponents of the climate rule rely on loose interpretations of Section 12 of the Securities Act of 1934 and Section 7 of the Securities Act of 1933 to mistakenly assume that Congress gave them broad authority to set disclosure criteria.
RealClearFoundation’s new Future Energy Forum challenges financial shocks and investor losses caused by SEC-like ESG disclosures.
During the “capital allocation (mis)” session featuring Terrence Keeley (watch the video linked above to see his segment), Chairman and CEO of 1PointSix, he raised the issue of how the SEC rules are a backdoor environmental activist. Mandatory climate disclosure is an undemocratic form of ESG policymaking that has not been approved by Congress or the US electorate.
“There are some decisions that people have to make about the environment. Those things have to be made democratically,” said Keeley, “not by some self-appointed elite in the Securities and Emissions Commission who have decided with hindsight what to do about emissions.” Scope 3. That is not the way to make decisions. And unfortunately, it will lead to less energy, less energy independence, and ultimately less energy cleanliness.
Responding to the idea that the SEC is serving the best interests of investors by forcing companies to disclose climate risks, Keeley said that most ESG fund disclosures do not justify their goals or address their environmental impact. SEC rules will do nothing to correct the lack of positive environmental impact of ESG funds or ESG-oriented companies.
“No one (ESG fund) claims to have influence,” Keeley said. “All they tried to do was beat the MSCI index, which they created themselves to develop this ESG industrial complex. And it didn’t achieve its goal.
Keeley and I both make it clear that the SEC rules will artificially infuse environmental consciousness into the company’s board decisions. This undermines the wisdom of doing proper risk management for the company.
In addition, greenhouse gas disclosures will provide climate activists with ample informational ammunition, who will use this as leverage to “force them to adopt expensive decarbonization targets,” Keeley said.
The SEC’s finalized climate disclosure rules represent the biggest regulatory blow to corporate freedom in the agency’s history. If the rule survives litigation or congressional intervention, many investors will suffer lower prices 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 researcher at the Competitive Enterprise Institute.
This article was originally published by RealClearEnergy and is available via RealClearWire.
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