The Securities and Exchange Commission is at it again. Straying from its core mission of “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation,” the SEC is now taking the mantle of climate activist. Chairman Gary Gensler’s signature policy, the Climate Disclosure Rule, was just approved in a partisan 3-2 vote. Companies will now have to disclose direct and indirect emissions that they produce to investors. This rule, in the guise of informing investors of material risks in companies, will overwhelm investors with information that is unrelated to actual risks to a company’s performance.
For example, how do the emissions coming from a company’s truck make an investment in that company riskier to investors? In this example at least, the answer is it doesn’t.
But even if you could find an example, the SEC already requires companies to disclose material risks, and insurers – whose entire business depends on analyzing and assigning material risk - do not factor in emissions.
So, what is the point of Climate Disclosure Rule? The SEC contends that the Rule is meant to inform investors on the climate risks of their investments. The trouble: investors don’t seem to care about climate risks. Letting the cat out of the bag, the SEC posted a study on their website which seems to demystify their motives, stating “investors only care about climate change risks when policymakers intervene, not about physical climate risks.” The SEC seems to be looking for a problem to their solution. Nonetheless, the agency continues to claim that investors are clamoring for climate risk information. But, as SEC Commissioner Hester Peirce noted in her dissenting comments, this creates a “hodgepodge standard” that could lead to the SEC creating disclosures for every type of social value. What’s next, will the SEC create antiwar disclosures, religious disclosures, or political ideology disclosures?
There is a point where over-disclosure is a threat to transparency, creating an obfuscation that hides real risks from investors. Spamming investors with non-material information will reduce the quality of the normal reporting process. Furthermore, the costs of disclosing every direct or indirect emission will be a significant burden borne by investors and eventually passed on to the consumer in the form of higher prices. For small companies, the compliance cost alone will be another job killing barrier to competing. For companies thinking of going public, this will be just another reason not to. This rule betrays the core mission of the SEC by making investments less transparent, markets less efficient, and preventing capital formulation.
The real reason the SEC is venturing into this murky terrain is that the current administration is beholden to the environmental social governance (ESG) movement, which seeks to starve disfavored industries and companies of capital. Climate disclosures are intended to shame U.S. businesses into divesting from such critical sectors as mining, logging, and power generation. Widespread adoption of the disclosures is essential for the creating an ESG economy that enriches the politically connected but leaves everyday Americans footing the bill with fewer jobs and higher prices. Unable to pass these unpopular policies through the ballot box or through the Congress, administrative agencies such as the SEC are the new battleground. The Rule is a big step in replacing the free market with an ESG-inspired state capitalism.
The Rule’s legality is highly questionable, which is why, despite being SEC Gensler’s main objective since taking office, it’s suffered delay after delay. After more than twenty-thousand public comments and intense public outcry, the SEC surrendered some important ground. Perhaps cowed by recent court decisions that require agencies to point to “clear Congressional authorization” for their authority, the SEC did a massive, last-minute rewrite, eliminating some major reporting requirements. But, even watered down, the final climate disclosure Rule clearly represents an overstep of the agency’s authority. The rule is clearly vulnerable to courts striking it down or to Congress reclaiming its authority through the Congressional Review Act to restrict the SEC to its actual mission.
My organization, the Financial Fairness Alliance, strives to uncover what the SEC and other U.S. regulators are up to. We believe that the public needs to be informed about what their government is doing because the government works for us, not the other way around. It is time for rogue agencies, like the SEC, to return to their core missions of protecting people and making our markets fair and transparent.
Justin Bis is the Director of the Financial Fairness Alliance. He has held senior government roles, including at the White House and the U.S. Department of Energy, where he assisted with recruiting top-level governmental leaders responsible for regulating the U.S. financial and energy markets.
