Regulatory Policy

The SEC’s Climate ‘Disclosure’ Gambit

Securities and Exchange Commission headquarters in Washington, D.C. (Andrew Kelly/Reuters)
The agency’s power grab is being heavily influenced by the administration’s need to trumpet climate-policy victories at the U.N.’s conference.

Inside the Beltway, most priorities are driven by the perceived political imperatives of the moment rather than by any set of actual principles. The ongoing herculean effort by the Securities and Exchange Commission to promulgate a rule forcing public companies to disclose the “risks” of climate change for their investors is no exception. It is clear that this rule will be followed by another seeking to mandate such “disclosures” by private companies as well. Indeed, this imminent rulemaking is a central component of the administration’s goal of forcing most of the private sector to endorse the climate “crisis” narrative, notwithstanding the body of evidence on the climate phenomena that is vastly more mixed and complex than commonly asserted.

Nor do I betray any secret by pointing out that this effort is being driven heavily by the administration’s need to trumpet climate-policy victories — pieces of paper — at the U.N.’s climate conference (COP-26), beginning in Glasgow on Halloween. The future impact of the existing Paris agreement would be trivial — 0.178 degrees C by 2100 — even if we take that agreement seriously (it is not). There exist massive rifts between the more- and less-developed economies on the magnitude of the subsidies to be delivered by the former to the latter states to induce them to substitute expensive energy in place of efficient power. (The demands from India are particularly vociferous, and the Chinese are not far behind.) And given the impossibility that any effective reduction in greenhouse-gas emissions will result from COP-26, the Biden pieces of paper actually might prove the most significant “achievements” in the record, however meaningless they are in reality considering the entire Biden net-zero-emissions goal would reduce global temperatures in 2100 by 0.173 degrees C.

And so back to the SEC disclosure effort. No plausible list of the SEC’s areas of expertise includes climate science and policy. It is difficult, then, to see the basis on which it can provide any reasonable framework for determining what such a “disclosure” rule should demand. The SEC does not know precisely what it wants companies to disclose, nor does it know how public companies are to evaluate such hugely complex topics as future climate phenomena disaggregated by sector and geographic region. (Even the IPCC has never been able to do so reliably even for the entire global surface or troposphere, let alone on a disaggregated basis.) It does not know which climate models companies should use, which assumptions companies should adopt on future atmospheric concentrations of greenhouse gases, on the amount of warming that any given assumption would yield, on the relative importance of natural and manmade (“anthropogenic”) influences on climate phenomena, or on the magnitude of mitigation to be yielded by human adaptations.

Given the fact that most of the effects of any anthropogenic climate change will not be observed for decades or centuries — indeed, because of normal year-to-year variation in climate phenomena, it would be impossible to detect many such changes (and by extension their effects) for those decades or centuries — the SEC cannot know that “climate risk” disclosures would be material for investors with time horizons that reasonably can be assumed to be, say, a decade or less. After all, forecasting what will or will not be accounted for in the price of a security is an imprecise science at best. In short, the SEC knows only that it wants a new rule for political purposes. That is the reality that explains its decision to send letters to some group of undisclosed companies asking about their current climate disclosures and recommending approaches that would expand the SEC’s 2010 guidance on such disclosures.

The SEC is putting the cart before the horse in a blatant effort to threaten companies with actual risks of regulatory actions and litigation. Should, say, a severe storm follow a company’s conclusion that climate risks are unimportant in its specific context, will SEC investigations and plaintiff attorneys be far behind? The letters are an unsubtle reminder that liability looms for any firm that fails to act in ways approved by the SEC, regardless of the climate uncertainties and the very large heterogeneity across firms and industries. The SEC knows first and foremost that the fear of litigation or regulatory action can weigh much more heavily than the actual merits of given issues when it comes to “persuading” companies to adopt the stances that the agency prefers.

SEC commissioner Allison Herron Lee claims that climate-risk disclosures must be “consistent” and “comparable,” but such platitudes obscure far more than they clarify. “Consistent” predictions might prove very wrong; merely compare the IPCC model predictions with the actual evidence. Inconsistent predictions would provide little useful information; how are companies to choose among them?

Because the SEC already requires disclosure of risks material to the given firm, we must ask what the SEC is trying to achieve. Commissioner Lee argues that a disclosure rule is needed because firms have incentives to hide material risks, as they compete for capital. This simply is not correct: Firms are long-lived entities, at least in principle, meaning that their long-run interest is served by preservation of their credibility. (Compare that central incentive with that of most government officials.) Disclosure of climate “risks” would require thousands of pages of analysis based on tens of thousands of pages of supporting documentation; any suggestion that this process would improve the information available to investors is not to be taken seriously.

Beyond serving as a political prop at COP-26, the SEC climate “risk” gambit is a blatant effort to constrain the availability of capital to politically disfavored industries. It is, therefore, an effort to return to Operation Choke Point, the clearly illegal attempt by the Obama administration to deny credit to certain industries. That effort and the forthcoming SEC climate-risk-disclosure regulation are obvious circumventions of the formal policy-making process. Any such expansions of government power must be authorized by Congress rather than imposed by unelected executive-agency bureaucrats. Adhering to this principle would preserve not only our constitutional institutions but the political accountability of government officials as well.

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