This Securities and Exchange Commission proposed a new rule on climate change and corporate disclosure earlier this year, and today marks the end of the rule’s public comment period. In response to the provisions of the proposed rule, the Competitive Enterprise Institute (CEI) is filing two comment letters: mine is here; the one by my colleagues Marlo Lewis and Patrick Michaels (co-authored with Kevin Dayaratna of the Heritage Foundation) is here. Each is joined by several co-signers from other public policy organizations. We also have also produced a one-page coalition letter summarizing our arguments.
While federal agencies frequently solicit public comment in hopes of improving their proposals, CEI’s comments recommend that the Commission abandon its climate disclosure proposal entirely. The proposed rule is unnecessary, unjustified, and an expensive exercise in environmental bureaucracy with little to no practical benefit for American investors. The billions of dollars in additional compliance costs it would generate would fall on the shareholders, employees, and customers of U.S. public companies, while the benefits would flow to a handful of large asset management, consulting, and accounting firms.
Below is a summary of objections to the Commission’s proposed climate disclosure requirements, discussed in greater detail in my full comment letter.
I. The Commission Lacks the Statutory Authority to Enact This Rule. The current proposal goes beyond the agency’s legitimate powers and is a dramatic change to its standard operating procedure. The SEC’s existing authority to require public companies to make disclosures of financially material information does not extend to environmental and social topics like climate change.
II. Requiring Subjective and Disparaging Disclosure Is Unconstitutional. The federal government’s authority to compel speech by corporations is generally limited to information that is “purely factual and uncontroversial.” That is clearly not the case with the proposed climate rule.
III. The Proposed Rule Is Rent-Seeking by Interested Parties. The ostensible “demand” for climate disclosure data is driven by an elite constituency of asset managers, financial analysts, consultants, and accountants who directly stand to benefit financially from the provisions of the proposal.
IV. The Proposed Disclosures Are Climate Policy Masquerading as Materiality. By introducing specific, prescriptive requirements rather than ones based on general materiality principles, the agency is trying to suggest that anything climate-related should be considered presumptively material.
V. The Rule Does Not Pass Any Reasonable Cost-Benefit Test. The SEC’s own estimates suggest that the current “external cost burden” of disclosure and compliance for public companies will rise from approximately $3.8 billion per year to over $10.2 billion, based on this rule alone.
VI. Estimates of Physical Climate Risk Are Exaggerated. Dramatic predictions of future climate disasters rely on overheated climate models that dramatically overestimate future warming and its hypothetical economic impacts.
VII. Estimates of Political Transition Risk Are Exaggerated. The policy changes for which the SEC is expecting firms to disclose related risks have been repeatedly rejected both legislatively and administratively. New action from Congress that would put energy-intensive firms in financial peril is extremely unlikely.
VIII. Estimates of Market Transition Risk Are Exaggerated. Consumer research, investor sentiment, and recent market trends do not support the Commission’s assumptions of major market risk.
The Commission should abandon this rulemaking and restate its current position that climate-related risks need only be disclosed by public companies if they meet the traditional definition of being financially material to investors.
Earlier this month CEI published my related analysis of the Commission’s climate disclosure proposal, “The SEC’s Costly Power Grab: The Securities and Exchange Commission’s Climate Disclosure Risk Proposal Threatens an End-Run around Congress on Climate Policy.” The comment letter being filed this week is an expanded version of this paper, which focuses on five of the above eight points.
Prior to the current proposed rule being issued in March of this year, the Commission issued a request for information (“Public Input Welcomed on Climate Change Disclosures”) in March 2021. In response to that request, CEI filed two comment letters in June 2021, one from myself, focused on finance and investing, and one from Marlo Lewis, focused on energy and climate policy. I wrote a blog post summary of my 2021 comments here and a summary of comment letters from other free market analysts here.