Richard J. Shinder: The SEC’s New Climate Demands Won’t Fix the Climate

The Securities and Exchange Commission (SEC), voted last March to approve a comprehensive set of rule changes. Public companies would be required to provide information about climate-related hazards and greenhouse gas emission. The SEC had expected to have these rules finalized by October and be able to begin implementation in early 2023. But the volume of public comment — along with a June 2022 Supreme Court ruling threatening the agency’s regulatory authority — have extended this timeline into the new year. 

The SEC’s move was no surprise: in July 2021, Chairman Gary Gensler That “investors increasingly want to understand the climate risks of the companies whose stock they own or might buy,” That and more “consistent, comparable, and decision-useful disclosures” This could be a good thing. Advocates of the proposed changes argue climate-related disclosures should be applied to public corporations, due to the existential risk associated with climate. Critics counter with concerns about the costs of compliance and mission creep at the SEC—a Depression-era regulatory agency originally established to protect investors. The critics are correct.

Start with the agency’s origins. The Securities Exchange Act of 1934 and Securities Act of 1933 were passed by Congress to protect investors and create a uniform regulatory system for securities trading. The mission of the SEC is “protecting investors, facilitating capital formation, and maintaining fair, orderly and efficient markets.”

The SEC has promulgated rules and supported legislation in pursuit of these objectives since then. The regulations include rules governing selective disclosure of information, deceptive and insider trading, as well as rules relating to false statements, misleading practices and insider trade. Legislation to create a safe haven for forward-looking statements. The SEC exists in order to protect investors, and to demand transparency from corporates.  

These proposed disclosures relate to climate change. They are coming at a moment when institutional investors, as well as environmental advocates, are increasing pressure on the investment community. In fact, recent developments have seen investment firms impose environmental mandates upon the private sector. Larry Fink’s 2020 Letter to CEOsHe highlighted the following: “how climate risk is compelling investors to reassess core assumptions about modern finance . . . [and] deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.” They’re examples of larger advocacy efforts to project environmental, social, and governance (ESG) principles on the way investors view public companies. 

While it is a good idea to have more information, mandatory disclosure requirements must be assessed against three important considerations: cost, expertise, and relevancy. The SEC would not have any difficulty securing the expertise needed to obtain climate disclosure. In this instance, the potential benefits could outweigh their costs. But the information the SEC is seeking — the risk that climate change poses to a company, and the effect that company has on climate change — bears little relevance to its statutory mission.

It is reasonable to make uniform disclosures about the effects of climate on companies. Public company disclosure obligations were designed, after all, to assess material risks that may threaten a company’s performance. The proposed rules do not distinguish between macro micro climate risks — and this is where things get tricky. The SEC said that firms would have to report the proposed changes. “how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.” In theory, the same formula could require disclosure of potential future nuclear conflict, solar flares, and viral pandemics. These information are so vast and broad that they cannot be used to evaluate the risks for a particular company.

The proposed “Scope 1” “Scope 2” rules—which relate to the effects a company has on the climate—would require SEC registrants to disclose their own greenhouse gas emissions and those of companies they do business with. The stated goal is “to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks” Companies shift to greener business models 

However, there are many assumptions at play. The notion that an inevitable outcome is possible “energy transition,” for instance, may be championed by political leaders, but it’s hardly foreordained. It is impossible to predict when and whether a transition to renewable energy sources would occur. Therefore, any SEC disclosure is highly speculative. According to the SEC, “the proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol”— but neither of these agencies (unlike the SEC) have the force of law.

Investors need to be aware of all potential risks that come with investing in companies.  But lawful activities could have an effect on the climate, but not its performance. Which is why the specter of them being prohibited by future environmental regulations is a major uncertainty that investors and fiduciaries can’t bank on.

Legal and financial problems surrounding ESG-related concepts have grown in the past 2022. This includes a number state selling billions under management from investment giants, such as BlackRock is a firm that has aggressively adopted ESG principles. The SEC’s proposed climate rules, in whatever form they ultimately take, will no doubt open up another front in the regulatory assault on markets.  What is clear is that requiring public companies to make climate disclosures imposes new costs — while providing few benefits, particularly for investors. 

Richard J. Shinder The founder of Theatine Partners, an international financial consulting firm. An earlier version of this story appeared in City Journal.

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