Dear Commissioner Lee,
Please find below comments from the Competitive Enterprise Institute (CEI) in response to selected questions posted on the Securities and Exchange Commission’s (SEC) website on March 15, 2021 under the heading “Public Input Welcomed on Climate Change Disclosures.”
CEI has published research in support of free markets and limited government since 1984 and has long advocated policies that increase investor choice and reduce barriers to accessing capital. CEI policy experts have recently commented on regulatory proceedings regarding the use of derivatives by registered investment companies (SEC), cryptocurrency wallets (FinCEN), and board diversity (SEC/NASDAQ). Regarding matters of environmental, social, and governance (ESG) investing theory, CEI experts have commented on recent rulemakings on the requirements of pension fiduciaries in selecting plan investments and fiduciary duties regarding proxy voting (Department of Labor), and on ESG theory in general in a recent in-depth study.
In the current proceeding, CEI has submitted two comments: this document and a second authored by Senior Fellow Marlo Lewis, Jr. in response to an alternate set of questions from the March 15 “Public Input Welcome” solicitation. This comment is also co-signed by representatives of eight additional public policy and research organizations, listed below.
The authors of both documents would like to thank CEI’s Myron Ebell, Iain Murray, John Berlau, and Ryan Nabil for their contributions to research on financial regulation, climate change policy, and related topics.
Competitive Enterprise Institute
Saulius “Saul” Anuzis
60 Plus Association
David T. Stevenson
Director, Center for Energy and Environment
Caesar Rodney Institute
Committee For A Constructive Tomorrow (CFACT)
National Center for Public Policy Research
Energy and Environment Legal Institute
Director, Regulatory Action Center
Texas Public Policy Foundation
1) How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to registrants as to what is expected of them? Where and how should such disclosures be provided? Should any such disclosures be included in annual reports, other periodic filings, or otherwise be furnished?
Jurisdiction and Appropriateness
Before answering those questions, we should ask whether such an effort is justified by statute and prudence, and whether other non-regulatory incentives or processes will satisfy the legitimate needs of relevant parties. The questions that are part of the March 15, 2021 “Public Input Welcomed on Climate Change Disclosures”  suggest a planned proceeding that would exceed the limits not only of the SEC’s statutory jurisdiction but also the constitutionally limited powers of any government entity. The agency’s mission must respond to changing market and finance industry conditions, but it cannot be infinitely elastic.
Advocates of expanded corporate disclosures and government enforcement of them frequently claim that there is already a “consensus” on the need and desire for such a policy. But if so much of corporate America and the finance industry is already in agreement on the subject, why is a mandate necessary?
Recent research by scholars at Boston and Harvard Universities finds that “environmental shareholder activism increases the voluntary disclosure of climate change risks” and that “companies that voluntarily disclose climate change risks following environmental shareholder activism achieve a higher valuation post disclosure.” This is evidence of mutually beneficial information exchange and a flourishing market for disclosure. The SEC should be very wary of disturbing the functioning and evolution of such a system.
Moreover, the scope of the current proceeding could become the first act of an ever-expanding drama of mission creep for the agency, as its final question suggests. Commissioner Lee’s March 2021 speech at the Center for American Progress suggests that a wide array of matters, such as health care (in particular the COVID-19 pandemic) and civil rights (in particular protests relating to the murder of George Floyd), fall under the SEC’s rulemaking authority because “the perceived barrier between social value and market value is breaking down.”
In light of this, the SEC’s leadership should ask itself several questions. Are there any statutory or prudential guard rails that will limit further expansion of the agency’s authority in the future? What about other federal agencies? Will the Commission object if, for example, the Department of Health and Human Services decides to regulate publicly traded pharmaceutical companies in a way that preempts its own normal functions? If the SEC has decided to extend its reach to areas outside of investor protection and capital formation, what principled defense will it have against overreach by other agencies?
Economist John Cochrane, responding in recent congressional testimony to a similar call for increased financial scrutiny of climate change-related topics, made an important point. The Central Banks and Supervisors Network for Greening the Financial System (NGFS), which the U.S. Federal Reserve recently joined, says that it plans to “mobilize mainstream finance to support the transition toward a sustainable economy.” The SEC now seems to have a similar goal. As Cochrane points out, however, “financial regulators are not allowed to ‘mobilize’ the financial system, to choose projects they like and de-fund those they disfavor.” Yet, the SEC appears poised to engage in just such an illegitimate economy-wide “mobilization,” without any authorization from Congress.
Disclosure Mandates as Failed Climate Policy by Other Means
The past actions of Congress on this topic are key. The types of “progress” in climate policy that the SEC seeks to obtain by other methods have repeatedly been rejected legislatively. The U.S. Senate, for example, unanimously approved the Byrd-Hagel Resolution in 1997 by a vote of 95-0, calling for the rejection of the Kyoto Protocol, which President Clinton signed as part of the United Nations Framework Convention on Climate Change treaty process. When Sens. John McCain (R-AZ) and Joe Lieberman (D-CT) introduced three successive “Climate Stewardship” Acts in 2003, 2005, and 2007, they all failed to garner the necessary support of their elected colleagues, despite extensive debate, news coverage, and lobbying. A similar defeat greeted the Lieberman-Warner Climate Security Act in 2008.
Later, under President Barack Obama, the Environmental Protection Agency (EPA) proposed an ambitious new program to regulate carbon emissions from the power sector, the Clean Power Plan (CPP). Based in part on President Obama’s famed 2014 boast that he would pursue a program of unilateral executive policymaking via “pen and phone,” the CPP essentially sidestepped Congress entirely. As the Competitive Enterprise Institute’s William Yeatman wrote at the time, “If finalized, the rule would constitute an unprecedented usurpation of power by the EPA from the states and fundamentally overhaul the electric industry. In fact, Congress never approved such a gross expansion of the regulatory state.”
Eventually, after being subjected to numerous legal challenges (including a highly unusual stay issued by the U.S. Supreme Court), the CPP was replaced when the EPA implemented the Affordable Clean Energy (ACE) rule in 2019, correcting much of the EPA’s earlier overreach. The ACE rule itself was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2021. Then EPA Administrator Michael S. Regan told members of the Senate Environment and Public Works Committee in February 2021 that the Biden administration would not attempt to reimplement the CPP.
All of that history and conflict appears to have weighed heavily on the minds of climate change policy advocates and helped shape their strategies going forward. They are now pursuing the same policy goals that have been rejected by Congress and repealed and replaced by the EPA through other regulatory agencies—including the Securities and Exchange Commission, the Department of the Treasury, the Federal Reserve, and other finance-related entities.
The effort to target alleged climate risks in investing via SEC regulations bears an uncanny resemblance to the effort launched under the Obama administration to target “high-risk” customers in the banking industry. Operation Choke Point, as it was known, demonized legal businesses in politically disfavored industries, negatively affecting their ability to access financial services. This multi-agency effort by the Department of Justice, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation, among others, went after businesses, like firearms, against which activists and members of Congress had repeatedly tried, and failed, to target legislatively. As the Competitive Enterprise Institute’s Iain Murray wrote in 2014, “Shifting the costs onto supervised bodies is not an acceptable principle of governance. Businesses need to be allowed to make their own business decisions without the threat of being required by their regulators to do their job for them.”
This leaves a close observer with the impression that any proposed rulemaking arising out of the process proposed by the SEC will simply be more climate change activism in a finance regulation wrapper, rather than a serious effort to foster better price discovery or remedy any real damage to investors. To the extent that the SEC’s current leadership is genuinely pursuing the latter, it should explicitly dedicate any resulting rules to maximizing market efficiency and risk-adjusted market returns to investors, not seek to minimize environmental metrics like greenhouse gas emissions. If this is really about financial risk, a future notice of proposed rulemaking should make that clear.