This week the Bipartisan Policy Center (BPC) hosted an event titled “Corporations and Climate: Potential Impacts of the SEC’s Proposed New Rule” on an important new regulatory proposal published by the Securities and Exchange Commission (SEC) on March 21. The BPC’s Tim Doyle and former SEC Commissioner Troy Paredes discussed the substance of the rule and the concerns many agency observers have already begun to voice about it.
While I was expecting a very middle-of-the-road tone to BPC’s event that basically assumed the legitimacy of the rule, I was pleasantly surprised to hear both Doyle and Paredes highlight some significant concerns with it. The participants didn’t necessarily agree with all of these potential objections, but the fact they flagged them as reasonable concerns was reassuring. You can watch the full event above, but here are a few potential red flags that caught my attention:
- The SEC may not have the statutory authority to enact this rule in the first place.
- Enacting affirmative climate policy and expanding corporate disclosure to benefit investors are two different things; the SEC may inappropriately be trying to do both.
- The agency’s itself admits that it has been “unable to reliably quantify” the cost-benefit impact of the rule.
- The proposal suggests that basing new regulations on existing voluntary frameworks will reduce burdens, but they underestimate the costs and risks of moving from partial voluntary compliance to legally mandated disclosure.
- The comment period (60 days) may be too short to properly evaluate a rule with such sweeping implications.
- The rule moves from a “principles-based” approach to disclosure to a more prescriptive approach that is out of step with the SEC’s usual procedures.
- Disclosing “scope 3” greenhouse gas emissions is vague and problematic; the promised “safe harbor” from fraud liability may be much less valuable that advertised.
These concerns are similar to the major issues that SEC Commissioner Hester Peirce flagged when she delivered her sternly worded dissent from the Commission’s majority vote to move forward with the proposal:
The proposal turns the disclosure regime on its head. Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes. How are they thinking about the company? What opportunities and risks do the board and managers see? What are the material determinants of the company’s financial value? The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.
I also wrote recently, for National Review, about the problems with the SEC’s foray into climate policy:
The SEC has always required firms to disclose financially material information about their structure, operations, and plans for the future. Something doesn’t—and shouldn’t have to—fall into a topic-specific bucket such as climate to be worthy of such attention. The SEC has traditionally used a “principles-based” approach to materiality, under which a company’s management draws attention to the risks and opportunities that it considers most important to that particular company. This allows for, as the SEC’s Walter Hinman described in a 2019 speech, a disclosure regime that “keeps pace with emerging issues … without the need for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.” The new proposals foolishly go in the opposite direction.
RealClear Foundation senior fellow Rupert Darwall also weighed in on the proposed rule in The Hill recently:
Climate disclosure is not, as the SEC claims, about giving investors information about climate risk. Rather, its main purpose is to force companies to provide information on their greenhouse gas emissions and those of their suppliers and customers so that shareholders, interest groups and others can enforce net-zero targets on them through proxy votes and other forms of engagement.
Back at the BPC event, former Commissioner Paredes reassured cynical listeners that the SEC does, in fact, take regulatory comment letters seriously and encouraged the audience to participate in the proceeding. You have until May 20 to do so. If you’d like some background information to get started, see the comment letters from last year on this topic sent in by myself and my distinguished colleague Marlo Lewis.