Report: SEC climate disclosure rule complicated by EU, California

A new Competitive Enterprise Institute report explains the problem businesses face complying with complicated, disparate climate disclosure rules imposed by multiple governments – the federal Securities and Exchange Commission, the European Union, and state standards (starting with California).

“Financial regulators from the U.S. federal government, California, and Europe have each mandated climate disclosure rules for companies, imposing major cost and compliance problems for many American corporations caught between two or even three overlapping regulatory schemes,” said Stone Washington, author of the report, Climate Disclosure’s Triple Threat.

Companies may be forced to spend millions of dollars in compliance costs to document their carbon footprint, on top of what they may have to spend to comply with EU or California requirements. Additionally, the EU’s “double materiality” requirement will generate inconsistency and incomparability, since U.S. firms already abide by a radically different understanding of materiality. Double materiality means a combination of what is financially important to the investor and what regulators deem to be societally or environmentally important.

“Cumulatively, these rules will impose severe cost burdens and multi-layered reporting requirements on firms for climate-related data of little interest to most investors,” said Washington. “Investors will be bombarded with climate disclosure spam,” like greenhouse gas emissions information, sustainability practices, and alleged climate-related risks. Research shows investors adjust their portfolios substantially less on days that coincide with corporate ESG press releases compared to other days.

Policymakers should consider the consequences of these overlapping rules, the report advises. For example, many public and private U.S. firms will avoid doing business in jurisdictions with onerous reporting requirements. And many private firms may avoid going public just to avoid the SEC’s excessive compliance costs and enforcement actions.

View the report, Climate Disclosure’s Triple Threat, by Stone Washington