The Corner

Capital Matters

Climate Legislation by Regulation: Now the SEC?

The seal of the U.S. Securities and Exchange Commission at SEC headquarters in Washington, D.C. (Jonathan Ernst/Reuters)

One of the numerous shared characteristics of “socially responsible” investing and the (closely linked) ideology of “stakeholder capitalism” is the way that both are being used to push through a progressive political and social agenda (particularly when it comes to environmental issues and, more specifically, climate change) without going through the usual democratic process.

One way of achieving this is by forcing change through by regulation rather than legislation.

I have written about this topic on several occasions, and, in a post yesterday, I linked to an article in Real Clear Energy by Rupert Darwall, in which (specifically) he looked at what has been going on (nothing good) at the CFTC (the Commodity Futures Trading Commission) but in which he also underlined the extent to which regulatory pressure (or the likelihood of regulation to come) could be contributing to a green bubble.

Darwall (my emphasis added):

The CFTC makes no secret of seeing its job as finding ways to channel capital toward net-zero investments. When financial regulators and central bankers start playing climate politics under the guise of promoting financial stability, they lose focus on their core responsibility. Markets thrive on diverse, often conflicting, views of the future. They over-heat when a single view predominates. Savage corrections can follow . . . . And therein lies the true threat to financial stability.

I’ve written a bit myself about what the CFTC is up to here, but I’d recommend Darwall’s demolition of its laughable report, Managing Climate Risk in the U.S. Financial System, both for the brutal fun of it, and as a warning of the way that dubious claims of risk prevention are being (or will be) used by regulators as a means to conscript private corporations into the climate campaign.

As Darwall notes, central banks (including, recently, the Fed) are getting in on this act. They too are justifying their behavior on the grounds of risk management, something which, in a talk given, rather bravely, to a conference organized by the European Central Bank (ECB), John Cochrane took apart here.

I’ve quoted this extract from Cochrane’s remarks before and, doubtless, will do so again, but:

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)

As for the idea that this is just about “disclosure,” well, as Cochrane makes clear, the insistence on disclosure is not designed to give investors or regulators information on which they can act, but is rather part of a regime “essentially of shame, boycott, divest, and sanction.”

We know where “disclosure” leads. Now all companies that issue debt will be pressured to cut off disparaged investments and make whatever “green” investments the ECB is blessing.

And that is why the green bubble, like some bubbles before it, is not entirely irrational, something that makes it all the more dangerous.

Meanwhile, this exchange, reported by Darwall, is of interest:

Shortly before her nomination as Treasury secretary in the Biden administration, Janet Yellen appeared on a Bloomberg New Economy panel discussing the role of central banks as the world struggles to emerge from the Covid-19 pandemic. The panel revealed a sharp difference of opinion between Yellen and one of her predecessors – Larry Summers, President Clinton’s second Treasury secretary. “Don’t we think that central banks really need to be careful about holding out the idea that they are relevant to sectoral issues involving differentials between one sector or another like environmental protection?” Summers asked. The environment is not within central banks’ “proper remit,” Summers suggested; having the Fed make special efforts to buy green bonds was “a confusion.”

“Confusion” is, in this context, a very, very kind word, but Yellen doesn’t appear to have taken the hint:

“On sustainable goals, I think it does make sense for supervisors to be taking the risks from both climate-related risks and the risk of changes in prices and stranded assets,” Yellen replied, articulating what has become the consensus among central bankers and financial regulators.

The accountancy profession is also, as I noted here, also leaping onto the climate-change bandwagon.

But progressive orthodoxy is not confined to climate change. As I discussed here, NASDAQ is pushing to be allowed to set diversity quotas for the boards of companies listed on that exchange, a bizarre move for an institution with the purpose (I always thought) of providing an orderly market for the trading of securities. 

And now we come to the SEC.

The Wall Street Journal:

President-elect Joe Biden is expected to choose Gary Gensler, a former financial regulator and Goldman Sachs Group Inc. executive, to head the Securities and Exchange Commission, according to people familiar with the decision.

Some of the items on what may, apparently, be on Gensler’s to-do list (whether one agrees with them or not) will doubtless fall within what has conventionally been understood to be the SEC’s remit, but this not so much:

Other priorities that a Democratic-led SEC are expected to consider include requiring companies to disclose more information about risks related to climate change and about workforce diversity…

“We need a new SEC chair who will put this climate crisis at the top of the agency’s agenda,” Sen. Elizabeth Warren (D., Mass.) said during a hearing late last year.

And if you think that’s good either for shareholders or for economic recovery, well . . .