The SEC and Climate Disclosures: Definitions of Risk, Circular Arguments, and Following the Money

Writing for the Financial Times, Patrick Temple-West:

[T]he biggest climate disclosure action of the year will be at the Securities and Exchange Commission in Washington. The agency has already uncovered gaps in companies’ climate-related reporting. Any rules the SEC adopts are almost guaranteed to be challenged in court; the fate of climate disclosures in the US could hang in the balance well into 2024.

Uncovered gaps!

Sounds ominous but click on the link to see what those gaps are. It leads to another report written by Temple-West. The FT has found new climate-risk disclosures from ten companies. These new disclosures (and there could conceivably be more of them) were in response to the SEC sending letters to “dozens of companies.” This does not seem to me the highest of hit rates, particularly as some of those disclosures may have been added just because it was less bother than arguing with the agency about them.

Temple-West:

Companies might have been simply compelled to add the climate risk disclosures to “get the SEC off our back”, said [Lee Reiners, policy director at the Duke University Financial Economics Center]. Halliburton, for example, received three SEC letters on its climate disclosures this year.

“If you are a company, your choices are either to say, ‘no, we think you are wrong’ or just say, ‘You know what?’ It is not worth the fight. Let’s just put this information in there,’” Reiners said.

But what were those disclosures?

Temple-West:

Halliburton, the oilfield services company, said it would add to its annual regulatory report in 2023 that a transition away from fossil fuels posed a risk to the company. “Developments associated with climate change concerns and energy transition” could hurt the company, Halliburton told the SEC in a letter made public in December.

“We believe that one of the significant risks that we face in energy transition is that we will be unable to innovate in a timely, cost-efficient manner, or at all,” the company said.

Other oil and gas companies also disclosed new climate risks after SEC prodding. EOG Resources told the commission it updated its annual regulatory filing this year to say climate change “may result in negative perceptions of the oil and gas industry” and that could hinder its ability to raise money. Murphy Oil also added language saying sovereign wealth funds, pensions and other investors had shifted investments away from fossil fuels.

Diamondback Energy added to its disclosures in August that “continuing political and social concerns relating to climate change may result in significant litigation and related expenses” . . . .

Companies outside the oil and gas sector have also updated their climate change risk disclosures. Defence contractor General Dynamics said new laws and regulations for greenhouse gas emissions “could increase environmental compliance expenditures”. Railroad company Union Pacific added emissions rules to a list of factors that could drive up its costs.

What unites those responses is not that climate change itself represented a material risk to the respondents’ business. Instead, the risk lies in the reactions to the perceived threat posed by climate change by regulators, legislators, investors and (inevitably) litigators, and its consequences. It’s easy to see how these could, under some circumstances, constitute material risks, but (with the possible exception of that posed by litigators) they are unrelated to the actual damage that climate change may cause.

Moreover, it’s not inconceivable that the requirement to make these disclosures to the SEC might be triggered by the adverse effects of rules that the agency itself is (or will be) proposing, a process that looks more than a touch circular.

In his later piece, Temple-West notes:

Companies have complained that these disclosures will increase their financial reporting costs. That argument has underpinned the corporate community’s opposition to previous SEC rulemaking, but it does not hold water, says Marty Vanderploeg, chief executive of Workiva, which handles SEC reporting for companies.

“For the people who do not like regulation it is the first thing they pull out of the box: the cost,” he told me. “This is not more complex than collecting financial information.”

So, the CEO of a company that helps companies handle their SEC reporting doesn’t see much of a problem with increasing those reporting requirements.

Fancy that!

In a similar vein, note this March 2022 report from the Wall Street Journal:

Professional-services firms are assessing an array of knotty and often subjective information from companies under a new proposal from U.S. securities regulators on climate disclosure….

The Big Four [accountants] and other professional-services firms in recent years have been working to beef up their climate literacy. KPMG in October said it planned to spend more than $1.5 billion over the next three years on climate-change-related initiatives, including training on environmental, social and governance issues for all 227,000 employees and efforts to advise businesses on how to meet net-zero emission targets. Ernst & Young in September said it would spend $10 billion over the next three years on audit quality, sustainability and technology. Deloitte, a sponsor of CFO Journal, didn’t respond to a request for comment on its planned climate-change-related investments.

PricewaterhouseCoopers in June unveiled a five-year, $12 billion plan to train employees on climate-related matters and hire 100,000 new people…

Some audit firms will likely generate higher revenue from clients, outweighing any cost increases stemming from hiring and training, BDO’s Mr. Tower said…

Amazing!

Professional-services firms also expect higher demand for their consulting offerings. Those would include advising clients on how to calculate their emissions estimates and working with them on the new disclosure rules. . . .

I’ve written before about the way that ESG, “sustainability” and other aspects of the ever-expanding climate-policy regime have created an ecosystem in which many businesses (consultants, advisers, and all the rest) have flourished. The SEC’s climate-disclosure rules (if approved in approximately their current form) seem destined to enlarge that ecosystem. To imagine that its denizens will do anything other than push for its expansion is to be naïve.