US businesses brace for a triple climate disclosure burden  

Thousands of US companies—both public and private—are bracing for an expensive wave of climate disclosure mandates. If regulators in the US and abroad have their way, firms will be hit from three sides with burdensome disclosure requirements by the US Securities and Exchange Commission (SEC), the European Union (EU), and the state of California.

My new paper explores the compounding compliance costs, inconsistencies, and overlapping administrative burdens that these disclosures will impose on US businesses.

No US business should be subjected to arbitrary environmental, social, governance (ESG) reporting. Such non-financial information stretches beyond the regulatory purviews of each government demanding this data. Mandatory ESG reporting also undermines corporate autonomy over the actual financial risks that most investors care about.

Each of the three disclosure mandates requires certain large companies to provide information about their perceived environmental impact. The universal goal is for financial regulators to gauge how external climate change risks may impact a company’s financial conditions.

The assumption is that investors are demanding more data from companies and desire to know about their exposure to climate change prior to investing in their business.

The reality is that most investors don’t care about a company’s ESG developments when executing purchases or sales of corporate securities. Research backs this up by showing that retail investors typically adjust their financial portfolios on days outside of the firm’s ESG press releases.

As my paper reveals, each of the three climate disclosure regimes contain internal differences that will generate reporting inconsistencies.

For instance, the SEC’s disclosure only requires firms to report climate change risks if deemed to be material (implied materiality). This conflicts with how the EU’s Corporate Sustainability Reporting Directive (CSRD) imposes an experimental double-materiality requirement, fusing financial and environmental concerns.

Additionally, California requires disclosure of material risks regardless of perceived materiality, generating further conflict.

Each mandate also relies upon its own set of reporting standards that aren’t cross-comparable, creating problems for investors.

The SEC’s rule leaves it up to the firm to decide which standard to adopt, while loosely basing its design on the Task Force on Climate-related Financial Disclosures (TCFD) framework. California adheres strictly to the TCFD framework, while the EU imposes 12 sets of unique standards arranged topically by ESG issue.

Each rule also imposes varying scope requirements and legal consequences for the disclosure of greenhouse gas (GHG) emissions. California’s Scope 3 requirement threatens to violate the Dormant Commerce Clause by regulating corporate emissions outside of the state’s boundaries.

Likewise, the EU’s Scope 3 unlawfully conscripts US-based companies that do business with their subsidiaries in Europe, requiring GHG emissions data to be shared for the CSRD.

The ensuing result will be mass confusion among competing firms and investors who will struggle to make sense of conflicting disclosures. This also undermines the universal goal to generate consistent and comparable climate disclosures for investors.

Beyond the inconsistencies of overlapping disclosures lie the crippling cost burdens. US firms may be hit with millions of dollars in compliance costs and penalties when dealing with two or all three ESG mandates.

The estimated regulatory costs are $12.3 billion for firms affected by all three rules. If that isn’t bad enough, the aggregate per-firm costs will be $3.2 million just to satisfy all three rule requirements.

In the post Dodd-Frank era, US businesses are saddled with more than enough cost burdens from existing disclosure rules. These arbitrary new ESG mandates add insult to injury by imposing additional compliance costs without generating any widespread investor value.

Lastly, my paper explores the punitive monetary penalties that each regulator is prepared to impose on noncompliant firms. While the SEC’s climate rule does not spell out its punitive consequences, prior noncompliant firms were hit with penalties as high as $1.15 million.

The EU’s penalties are assessed based on how much individual member states deem sufficient for noncompliant firms to pay. So far, this amounts to $14.4 million for firms under 1/3 of EU countries that have integrated the CSRD into their laws.

California’s three-part rule can impose over $1 million in cumulative monetary penalties to businesses that trigger multiple violations.

US businesses are bracing for the worst as regulators prepare to unleash a tidal wave of ESG spam. The SEC, EU, and California are each racing to implement their own unique set of climate disclosure laws that will cripple US businesses with devastating compliance costs and paperwork obligations.

In sum, each rule generates a set of reporting inconsistencies, imposes unrealistic expectations, and sets companies up to pay for costly monetary penalties for noncompliance.

US businesses should not be slapped with a triple climate disclosure burden; regulators have no right to demand corporate disclosure of nonfinancial and immaterial ESG data. My latest paper sends a strong warning to US firms preparing for the policy disaster that awaits if these disclosures are allowed to go into effect.