Climate Change: The SEC Turns Up the Heat

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The Securities and Exchange Commission (SEC) voted 3–1 this week to propose new rules by which public companies would be required to disclose additional information related to their greenhouse-gas emissions and the climate risks they may face. This is a major move for the agency, which had previously tried to avoid taking sides in politically contentious public-policy debates. The SEC’s proposal would be difficult, on any reasonable interpretation, to square with the exercise of its normal authority over financial markets, and is yet another troubling example of regulatory mission creep. It is also a disappointing and alarming development for those who care about property rights and a competitive, growing economy.

It was the departure of Republican commissioner Elad Roisman this January that made this vote an inevitability and left Commissioner Hester Peirce as the sole dissenter to the new proposal. We could have expected Roisman to oppose the new climate disclosure requirements not only because of his political background in general, but because of his skepticism toward environmental, social, and governance (ESG) investing, in particular. (Recall that in a 2020 speech, he facetiously redefined the movement with a request that “Everybody, Stop Grandstanding.”)

Given Commissioner Peirce’s current position, therefore, we should give special attention to her statement at Monday’s open meeting at which the new proposal was announced and approved. Her assessment, read during the live webcast of the meeting and published on the SEC’s website, was impassioned and blistering in its opposition. “Many people have awaited this day with eager anticipation,” she began her remarks. “I am not one of them.”

Peirce argued that the new proposal is not needed to cover legitimate climate concerns, misapplies the concept of materiality, will not lead to consistent data reporting, is legally unjustified, and ignores significant compliance costs. These critiques range from foundational to merely practical, but together form a devastating counter-blast to the commission’s most significant rulemaking of the Biden era. The problems Peirce identified are worth considering individually.

The SEC has always required firms to disclose financially material information about their structure, operations, and plans for the future. Something doesn’t — and shouldn’t have to — fall into a topic-specific bucket such as climate to be worthy of such attention. The SEC has traditionally used a “principles-based” approach to materiality, under which a company’s management draws attention to the risks and opportunities that it considers most important to that particular company. This allows for, as the SEC’s Walter Hinman described in a 2019 speech, a disclosure regime that “keeps pace with emerging issues . . . without the need for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.” The new proposals foolishly go in the opposite direction.

Similarly, the concept of materiality itself gets a problematic twist. By introducing specific, prescriptive requirements rather than ones based on general financial principles, the agency is trying to put its thumb on the scale and suggest that anything climate-related should be considered presumptively material. This is not an honest attempt to protect investors; it is climate activism in finance-regulation drag. The goal is to force firms to disclose information about greenhouse gases and carbon intensity on the assumption that future investors will penalize them because of it. The one silver lining in this case is that investors — if they are left to make up their own minds — are unlikely to consider “climate exposure” nearly as much of a poison pill as the climate campaigners are hoping.

Read the full article at National Review.