Report: SEC climate disclosure rule imposes costs without value

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The Securities and Exchange Commission (SEC) is finalizing a rule to require publicly traded companies to disclose climate and energy-use related data and information. The 500-page rule is the centerpiece of the SEC’s agenda on environmental, social, and governance (ESG) investing.

A new report from the Competitive Enterprise Institute (CEI) argues the climate disclosure rule exceeds the commission’s statutory authority, undermines its existing disclosure-based framework, and greatly increases costs and work-hour burdens for companies subject to the mandate.

Under the SEC’s proposed rule, companies must report how climate change risk factors influence their financial decisions, business, models, locations, and projects. Regulated companies will be required to capture and report data on their direct, indirect, and value-chain produced greenhouse gas (GHG) emissions.

By capturing data from regulated companies’ value-chain – known in the rule as Scope 3 emissions (Scope 1 are direct emissions, Scope 2 are indirect emissions) – the rule would greatly expand the SEC’s regulatory reach, allowing it to demand information from a host of private entities that are not usually the target of the commission’s regulatory powers. The rule’s requirements would harm many non-regulated suppliers, including farmers, ranchers, and facility owners, simply because they do business with a registered company.

The SEC’s perception that climate change presents a material concern for investors directly conflicts with the U.S. Supreme Court interpretation of “materiality” in corporate disclosure. In its current form, the climate disclosure rule’s Scope 3 mandate will compel unregulated private companies to turn over sensitive GHG emissions data to registered firm partners. This backdoor regulation will likely be deemed by a reviewing court to compel information that is financially immaterial.

The rule will also impose a substantial regulatory cost burden on public companies and their private partners. Under the SEC’s own calculations, the average firm will pay an extra $864,000 for the mandated disclosures, though some analysts believe the actual cost will be higher. Firms will also be forced to hire lawyers, accountants, and ESG experts to contend with the rule’s estimated 39 million additional hours of paperwork.

In a telling admission of the rule’s expected burden, the SEC itself apparently cannot finalize its climate disclosure rule without first bolstering its own staff. Within a month of proposing its climate rule, the SEC asked Congress for an additional $101 million in funding to hire new ESG-focused staff.

“In its current form, the SEC’s proposed climate disclosure rule will lead to expanded red tape, huge compliance costs, lawsuits, and little meaningful disclosure,” said study author and CEI research fellow Stone Washington. “The SEC should reconsider implementing the rule, leave climate policy to the EPA, and focus on its statutory mission of collecting disclosures of financially relevant information.”

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Washington for Discourse Magazine: The SEC’s Progressive Rulemaking Will Be Its Statutory Undoing