Reviewing SEC Climate Disclosure Comments

Earlier this week, I wrote a short summary of the comments from myself and my colleague Marlo Lewis to the Securities and Exchange Commission (SEC) on climate disclosure for public companies. The SEC’s solicitation to comment on the topic generated a long list of other excellent comments, though, so I’d like to summarize a few more for future reference. (Summarized points and hyperlinks are mostly my own; refer to the full, linked comments for a more detailed discussion.)

Katie Tubb, Senior Policy Analyst, Heritage Foundation (comment)

• What the SEC is considering in this area is outside of its statutory authority. Only a new grant of authority from Congress could authorize it to proceed. 
• The SEC already requires disclosure of climate-related risks; the agency should not alter the traditional definition of materiality.
• Current proceeding about climate is “a proxy for deeper philosophical economic change” and not part of the SEC’s mission.
• Enforcing new disclosure requirements could generate additional transition risks; we are already insufficiently prepared for the additional minerals and renewable infrastructure we supposedly need.
• There are connections between climate policy makers, environmental activists, and firms investing in renewable energy projects that raise conflict of interest concerns.
• A new climate framework would have to resolve controversial and substantive debates about science and engineering topics that are beyond the SEC’s expertise and purview. For example, should nuclear power be considered a “green” alternative to fossil fuels or excluded, as many environmental activists (and the co-sponsors of the Green New Deal) insist?

Benjamin Zycher, Resident Scholar, American Enterprise Institute (comment)

• Scientific uncertainties about future climate change impacts are “vastly greater than commonly asserted.”
• Firms required to comply with new disclosure mandates are likely to do things that “insulat[e] them from adverse regulatory actions and litigation threats” rather than actually produce economically valuable information.
• Benefits from increased greenhouse gas concentrations will likely be ignored, as will the significant risks associated with proposed climate change policies.
• Even the most severe restrictions on greenhouse gas emissions would produce results in the global weather system too small to be measured. A policy aimed at total decarbonization will never pass a rational cost-benefit analysis.
• The inherent uncertainty over climate risks, coupled with a fear of litigation, will cause corporations to demand additional regulation. Expensive compliance theater will increasingly displace positive-sum market activity.
• Demonizing energy-intensive economic activity is political favoritism that recalls unconstitutional excesses of the Obama administration’s infamous Operation Choke Point.

Ryan Morrison, Attorney, Institute for Free Speech (comment)

• The SEC does not have statutory authority to compel climate change disclosure, but even if it did, specific statutory authority would not resolve the First Amendment problemsthat  any such rules would present.
• Requirements on companies to disclose information on environmental, social, and governance (ESG) topics have previously struck down by federal courts.
• Any SEC rule in this area would have to be relevant to a substantial government interest, directly and materially advance that interest, and be narrowly tailored. SEC’s current direction would likely not satisfy that test.
• The agency has less restrictive means to advance the same objectives, including existing voluntary standards, the current disclosure regime, and guidance that already addresses climate risks.
• “[R]equiring a company to publicly condemn itself is undoubtedly a more effective way for the government to stigmatize and shape behavior than for the government to have to convey its views itself, but that makes the requirement more constitutionally offensive, not less so.”

Joe Shoen, Chairman, Amerco/U-Haul (comment)

• SEC has historically emphasized principles-based disclosure rather than prescriptive standards. That is the superior approach and rightly emphasizes quality rather than volume of disclosed information.
• Specific mandates would “prevent the organic development of materiality standards to fit changing circumstances and market preferences.”
• The direction in which the SEC seems to be heading would violate the U.S. Supreme Court’s longtime “reasonable investor” materiality standard as laid out in TSC Industries v. Northway (1976).
• New climate-specific disclosures would put an emphasis on achieving social policy goals rather than the SEC’s mandated mission of informed investors and efficient markets.
• Recently, the agency performed a cost-benefit calculation of principles-based disclosure and found it to be superior. Any new rulemaking in opposition would have a high legal bar to clear.
• Lenient First Amendment scrutiny applies only to laws that require the disclosure of “purely factual, uncontroversial information.” Protections for commercial speech are particularly strong when a rule is “directed at achieving overall social benefits” rather than “generat[ing] measurable, direct economic benefits to investors or issuers.” New climate or ESG disclosure rules would certainly violate these protections.
• The drawbacks of greenhouse gas emissions and the “social cost” of carbon needs, at the very least, to be weighed against the advantages of affordable energy and everything of value that it creates and makes possible. 

Phil Rosetti, Resident Senior Fellow, R Street Institute (comment)

• Climate change is a “slow moving, incremental financial risk that is manifested heterogeneously throughout the economy.” Changes will affect different firms differently and new regulation, if any, needs to reflect that.
• There are already private, voluntary organizations (like the Sustainability Accounting Standards Board) providing climate-related disclosures and determining materiality and relevance of various metrics.
• Mandating uniform disclosure across all public companies “would offer little utility.”
• Climate risk is complex and changes across time; “merely identifying the presence of risk does not inform the magnitude of the risk.”
• The vulnerability of firms to physical climate risks is already well-recognized by the most vulnerable firms. Risk mitigation firms, in particular reinsurance companies, are already pricing alleged climate externalities.
• Companies are in more peril from climate policy than any actual physical impacts.
• Greenhouse gas emissions disclosure requirements could actually exacerbate risks. Moving from conventional to electric vehicles that require additional rare minerals from politically unstable areas could make supply chains less reliable.
• It’s not the place of the SEC to nudge firms toward politically preferred social goals.  

All of the letters submitted in response to the SEC’s March 15, 2021 invitation to comment are here. All of the Competitive Enterprise Institute’s banking and finance-related work can be found here.