I have just started reviewing the SEC's climate change proposal, which is over 500 pages, which tells you something right there.
The WSJ reports:
The Securities and Exchange Commission formally offered a 534-page proposal Monday that would force publicly traded companies to report greenhouse-gas emissions from their own operations as well as from the energy they consume, and to obtain independent certification of their estimates.
In some cases, companies also would be required to report greenhouse-gas output of both their supply chains and consumers, known as Scope 3 emissions. An SEC official said most companies in the S&P 500 would likely have to report Scope 3 emissions. Companies would have to include the information in SEC filings such as annual reports.
Some thoughts. (1) This is yet another example of the increasing use of regulatory end-runs by Presidents of both parties. With Congress deadlocked and unable to move on addressing climate change, Biden is using executive orders and regulatory actions to effect change without Congressional action. In doing so, however, he perverts the Constitutional scheme of checks and balances.
(2) Retail investors are already overwhelmed by mandated disclosure. In an era of 100-page proxy statements and annual reports, owning just 20 stocks subjects one to thousands of page of disclosure--vetted if not written by lawyers. The proposal thus represents another shift in the SEC away from its historic mission of protecting retail investors. Instead, as the Journal opined:
SEC Chairman Gary Gensler is redefining materiality as whatever BlackRock and progressive investors want to know.
(3) The requirement that companies disclose Scope 3 emissions will make the rule even more costly and burdensome than the absurd combat mineral disclosures companies have been struggling with for the last decade:
For example, Exxon Mobil would have to report its direct emissions as well as any from fossil fuels burned to generate the electricity it uses. It may have to quantify emissions from the combustion of its products, the tankers that deliver them, and the manufacturing of its rigs and plastic products when they degrade.
Scope 3 emissions have no clear definition. The agency says it has “not proposed a bright-line quantitative threshold for the materiality determination” for Scope 3 emissions because this “would depend on the particular facts and circumstances, making it difficult to establish a ‘one size fits all’ standard.”
Yet the overall rule would impose a one-size-fits-all regulation on thousands of public companies.
There is a significant risk of double counting Scope 3 emissions. An upstream issuer discloses emissions by its customers, while a downstream issuer reports the same emissions (as well as those its supplier).
In other words, we're going to make you companies undertake a hugely burdensome process with no guidance as to whether you're doing it right. But if we decide you did it wrong, we sue you. Heads, the SEC wins; tails, the company loses.
And, speaking of the analogous disclosure regime on conflict minerals, is there any evidence that that regime has educed the use of conflict minerals or made anybody's life better? Or helped investors make more money? I am not aware of any.
(4) As SEC Commissioner Hester Peirce explained in opposing the regulations, the proposals are way outside the SEC's wheelhouse and probably exceed the SEC's authority. (You really need to go read her statement, which is a brilliant dissection of the proposal.)
Congress gave us an important mission—protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets—and granted us sufficient regulatory authority to achieve that mission. Effective execution of that mission forms the basis for healthy capital markets and, in turn, a healthy economy. Congress, however, did not give us plenary authority over the economy and did not authorize us to adopt rules that are not consistent with applicable constitutional limitations. This proposal steps outside our statutory limits by using the disclosure framework to achieve objectives that are not ours to pursue and by pursuing those objectives by means of disclosure mandates that may not comport with First Amendment limitations on compelled speech.
All the disclosure mandates we adopt under authority granted to us by Congress are at bottom compelled speech, and this one in particular prescribes specific content for the speech that it mandates. ...
Large asset managers—who are paid to invest other people’s money—some institutional investors, and some retail investors have been vocal proponents of climate change disclosures. But why are they asking? If they are asking for information to help them assess the financial value of companies in which they are considering investing, this information may be material and is likely covered by existing disclosure rules. But many calls for enhanced climate disclosure are motivated not by an interest in financial returns from an investment in a particular company, but by deep concerns about the climate or, sometimes, superficial concerns expressed to garner goodwill.
I will have more to say about the proposal as it goes forward. But for right now, it's shaping up to be a disaster,
