Should the SEC Require More Climate Data from Public Companies?

This week, Case Western Reserve University law professor (and CEI alum) Jonathan Adler hosted a fascinating event titled “Climate Change, Financial Markets & Corporate Disclosure,” with law professors and financial regulation experts Madison Condon and Kevin Haeberle. This was especially timely, as the event description pointed out:

In March, the Securities and Exchange Commission asked for public input on whether current disclosure requirements adequately inform investors, market participants, and the public of climate-related risks. According to some, financial markets systematically underprice the broad, systemic risks presented by global climate change. Others discount the value of more stringent climate disclosure requirements and question whether financial and securities regulators are in the best position to address climate-related concerns.

That request for public comment, published on March 15, 2021 by then-Acting Securities and Exchange Commission (SEC) Chair Allison Herren Lee, contains 15 detailed questions about how the SEC should—or should not—require more detailed disclosures from public companies about climate-related topics. Many market observers are working on their own comments now. Some prominent organizations, like the Sustainability Accounting Standards Board, have already written and publicized theirs.

Condon began with arguments from a forthcoming paper, “Market Myopia’s Climate Bubble,” in which she says that “a broad array of government interventions are necessary to mitigate climate related financial risks” because market participants “may not be accurately incorporating climate change-related risks into asset prices.” She suggests that market actors:

1. Lack the fine-grained asset-level data they need in order to assess risk exposure;
2. Continue to rely on outdated means of assessing risk;
3. Have misaligned incentives resulting in climate-specific agency costs;
4. Have myopic biases exacerbated by climate change misinformation; and
5. Are impeded by captured regulators distorting the market.

Condon and Haeberle engaged in a brief discussion of Condon’s mispricing theory, with Condon citing research by mega-asset manager BlackRock (presumably the report “Getting physical: assessing climate risks” from 2019) that climate risk for physical assets has been insufficiently acknowledged.

Haeberle responded with a suggestion that other recent research cuts against some of Condon’s assertions—including two papers by Patrick Bolton of Columbia University and Marcin T. Kacperczyk of Imperial College London, “Signaling through Carbon Disclosure,” from January 2021, and “Do Investors Care about Carbon Risk?” from 2019. The second paper finds that “stocks of firms with higher total CO2 emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors.”

Haeberle also mentioned testimony from a recent Senate Banking Committee hearing on climate risk that included statements from the American Enterprise Institute’s Ben Zycher and economist John H. Cochrane. 

Haeberle offered a more skeptical look at enhanced disclosure requirements, reminding the audience of the essential function of markets in communicating valuable information. He acknowledged that some firms will always have an incentive to not disclosure information they regard as damaging (or even concealing positive information for strategic reasons), but that the socially optimal amount of corporate disclosure isn’t automatically “more.”

Moreover, market insiders like accountants, consulting firms, and compliance attorneys can be expected to welcome more disclosure requirements for self-interested professional reasons.

Haeberle is also the coauthor, with University of Chicago Law Professor M. Todd Henderson, of the 2016 article, “Making a Market for Corporate Disclosure” (revised in 2018). In that paper, Haeberle and Henderson argue that the SEC should shift its approach to corporate reporting to allow firms to sell tiered access to their disclosure data to the parties most interested in obtaining it. This would give firms a financial incentive to provide useful and accurate information, while eventually making the same information publicly available. This approach “would require repealing an SEC rule barring tiered disclosure and liberalizing more general regulatory attitudes regarding the same,” but would not require changing insider-trading laws.

There is clearly much more to be written and said on the topic between now and when SEC comments are due in June, in response to Commissioner Lee’s 15 questions posted in March. Watch this blog for more updates.