Federalist Society Experts Duel on Climate Risks and Regulation

Earlier this week, the Federalist Society presented a panel discussion titled “Corporate Social Responsibility, Investment Strategy, and Liability Risks” that addressed some important issues related to the increasing interest in environmental, social, and governance (ESG) investment theory. This discussion is especially timely because corporate America and environmental activists are now in a waiting game to see what new regulations the Securities and Exchange Commission (SEC) will be issuing on disclosures, likely mandatory, of new firm-level information related to climate. The goal of such disclosures is to penalize firms that continue to use traditional energy sources and benefit those that produce, and consume, less reliable intermittent sources, like wind and solar.

At the center of the discussion was the perspective of panel participant and former White House counsel C. Boyden Gray, who wrote recently in The Washington Post: “When it comes to climate, the SEC should quit pretending to be the EPA.” Concerned by President Biden’s “whole of government” approach to climate policy, Gray wrote:

Under our constitutional structure, federal regulators only have the authority granted by Congress. Lawmakers gave the SEC specific responsibilities in regulating securities markets and preventing fraud and other abuses of investors. … The SEC’s congressional mandates do not include regulating the climate.

Despite that reasonable perspective, the SEC, led in this initiative by Commissioner Allison Herren Lee, is likely to issue a noticed of proposed rulemaking on climate disclosures before the end of the year. In March, then-Acting Chair Lee published a list of 15 questions under the headline “Public Input Welcomed on Climate Change Disclosures.” Many market participants and observers, including the policy staff at the Competitive Enterprise Institute, submitted detailed comments in response.

My take was focused on corporate governance and markets, while my colleague Marlo Lewis wrote an excellent analysis of how potential disclosure rules relate to climate science and policy. The main problems with the policies suggested by Commissioner Lee’s questions include both Gray’s point about the SEC’s lack of jurisdiction, but also conceptual issues about uncertainty of climate predictions and concerns related to free expression and association. Our comments were co-signed by representatives of several other research and advocacy organizations. (I also wrote a couple of blog post reviews of other organizations’ comments here and here.)

In spite of those arguments, some participants in this week’s event—and many other observers—seem think that the predicted future severity of anthropogenic climate change renders these concerns irrelevant. That was the approach of a Dutch court earlier this year that ordered Royal Dutch Shell to reduce its greenhouse gas emissions 45 percent by 2030. As I wrote for Law & Liberty in July, this was a dramatic departure from traditional rule-based law:

In determining what constitutes such a standard [of “proper social conduct,” that Shell allegedly violated], the court invoked international agreements and documents including the European Convention on Human Rights (ECHR), the United Nations’ Guiding Principles on Business and Human Rights (UNGP), and the OECD Guidelines for Multinational Enterprises, among others. Those invocations suggest a post hoc rationalization by the court for a preexisting conclusion it wanted to reach. More importantly, the motivated reasoning and loose definitions employed could easily be used by a future court to reach conclusions and compel actions that are even more radical.

So, despite the fact that the Dutch government had not provided for applicable greenhouse gas limitations via statute or regulation, the court decided that Shell was guilty simply of “improper social conduct” and issued a prescriptive order in response. This seems to be the level of unconstrained authority to which many current U.S. policy makers aspire.

Some of the current policy ideas related to things like climate and other ESG topics are not new, but retreads of proposals that simply failed to garner support in Congress the first (or second or third) time around. Climate activists would love to have implemented a carbon tax, a cap-and-trade scheme for emissions, or another comprehensive climate policy already. Unfortunately for them, they failed to do so in Congress, and President Obama’s executive-level Clean Power Plan was dismantled by the previous administration.

Having failed repeatedly to pass their preferred policies via the front door, advocates are attempting to get what they can indirectly, via SEC regulation of public companies. But the goal is the same—radical decarbonization of the U.S. economy at any cost. Yet, putting the lipstick of “social responsibility” on the pig of higher energy prices will not fool the American people for long when the bill for these policies comes due, as it already has in Europe.