Playing Both Ends of the Field on Climate Risk

T he regulatory apparatus at the Securities and Exchange Commission is running full tilt these days, with the agency pushing forward major rules in a number of areas, from retail stock trading to SPACs. But none of them are as ambitious — or as complex and costly — as its rule on climate disclosure. That 500-page proposal, which was published in March of this year, would require public companies to disclose large volumes of new data on their operations, management, and future plans, including the alleged market risk from future climate change. The Commission has strayed beyond its legitimate role and is not just warning investors about risk — it’s manufacturing it in service of climate policy.

When describing the so-called transition risks that companies might face from climate change, the Commission’s proposal repeatedly cites “changing consumer, investor, and employee behavior and choices,” and other similar formulations. The agency is suggesting that companies with large carbon footprints might find themselves abandoned by climate-conscious customers, investors, and even employees. Because of this hazard, the SEC expects firms to plan for and explain how they will be “financially impacted by a transition to a lower-carbon economy.”

This might seem reasonable at first: All kinds of changes can impact a firm’s future success, and it would be of interest to at least some investors to read about management’s strategies. But the SEC already expects companies to make disclosures about the market conditions and changes they find most likely to affect their bottom line. This new rule would change that and put the government’s thumb on the scale, essentially insisting that anything climate-related be given priority and importance, even if the companies themselves would not deem it to be financially material.

This unique, heightened status for climate risks is clearly intended to drive corporate and investor behavior, not just inform it. The existence of the proposed rule functions as a regulatory magnet, pulling market participants toward a greater emphasis on greenhouse gases and energy efficiency, even if those topics wouldn’t normally be relevant to the firms and investors involved. As dissenting Commissioner Hester Peirce put it when the proposed rule was first unveiled, “the proposal. . . tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies.” [emphasis in the original]

The disclosure demands are obviously intended to change market behavior in a specific direction, and proponents of climate finance are already praising the results they expect. Profs. Shivaram Rajgopal and Bruce Usher of Columbia Business School recently wrote about the proposal for Bloomberg Law, acknowledging that the SEC climate-disclosure rule is built on such a dubious legal basis that there is a significant chance it will be overturned. Regardless, they’re in favor of it, since its mere existence would “encourage businesses to change strategy, taking steps to move capital out of fossil fuels and toward renewable technologies and other solutions to climate change.” The SEC itself seems to be advancing on this same calculus.

Even a fundamentally flawed rule could still give the Commission what it wants, which is alarming news for constitutional government in this country. The threat is not just to the companies that are directly regulated by the SEC — the same analysis could be applied to any major change that executive branch policymakers would like to see (but can’t get Congress to enact). The Department of Labor might want companies to disclose the risks they face from a $30 federal minimum wage. The Equal Employment Opportunity Commission might like to see their plan for the transition to a mandatory 50-percent-female workforce. Future policymakers could just as easily ask firms whether they have planned for a future in which all firearms are banned, employers are required to pay for abortions, or all right-to-work laws are repealed. The federal government might as well ask CEOs: What is your plan for a property rights and due-process-constrained future?

The obvious problem with this approach is that officials engaging in such demands are not responding to actual risks. Rather, they are projecting their policy preferences onto a highly speculative future and, in the process, creating new political and market risks. It might be possible that, in the future, Congress will pass legislation that would present a bona fide financial risk to energy-intensive firms. Pollsters and pundits can certainly debate the likelihood of that. But a government mandate to plan for such possibility is not simply asking for disclosure — it is an activist strategy for implementing the policy in question.

Thus, the SEC is trying desperately to bootstrap its preferred market trends into reality, and steer capital flows toward its preferred firms (the ones best poised to feed off of current and future green-energy subsidies) and away from its most disfavored firms (the oil, gas, and coal companies that provide nearly 80 percent of all the energy in the modern economy). That’s clearly outside the SEC’s mission and statutory authority, providing grounds for a federal judge to block this proposal on the first day it becomes an official rule.