SEC Ignores Its Own Goals in Trying to Require Disclosures of Climate-Related Information
In 1934, Congress established the SEC and gave it a three-part mission: (1) to protect investors, (2) to maintain fair, orderly, and efficient markets, and (3) to facilitate capital formation.
However, in March, the SEC adopted a final rule requiring public companies to disclose various levels of climate information including, among many other categories, “any climate-related risks identified by the registrant that have had or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, or financial condition in the short-term (i.e., the next 12 months) and in the long-term (i.e., beyond the next 12 months).”
These disclosure mandates do nothing to help the SEC meet its three goals. The SEC already requires that companies disclose material information to investors, thus making the new climate disclosure rules superfluous. Furthermore, in its rule, there was no evidence provided by the SEC that a company failing to provide climate-related disclosures harmed any investors. By requiring companies to disclose climate-related information the SEC is not protecting investors as there has been no harm shown to investors.
The climate disclosure rule will also impede the SEC’s statutory goal of maintaining efficient markets and facilitating capital formation. The rule will force companies to incur massive costs in order to comply. Many experts, in both comments provided to the SEC and in congressional testimonies, have expressed concerns over the impact the rule will have on companies and capital formation. In a comment to the initial proposed rule, one expert expressed concern that, “compliance actions raise costs on firms and these costs increases incentivize firms either to stay private (if they are already private) or to go private (if they are currently public) … For many companies, avoiding these disclosure costs may lead them to seek capital in alternative, non-public markets.” This concern is especially significant to smaller companies looking for an injection of capital to grow their business. These onerous disclosure requirements will discourage companies from going public so to avoid being subjected to SEC regulation and having to disclose this climate-related information.
Another expert, a CEO of an energy company, testifying before the House Financial Services Committee expressed his concerns, saying “energy companies may conclude that they cannot bear the increased costs of compliance and subsequent litigation over allegedly misleading disclosures, and they will be forced to go private, which increases their cost of capital, and which in turn will lead to even more increase in the costs of energy production and ultimately increased costs for energy consumers.” While this concern refers to energy companies, the risk remains the same issue: these climate-related disclosures, due to their high costs for companies, can result in less efficient markets. These disclosures, thus, do not show themselves to help the SEC achieve any of its three-part mission, and, in turn seem more likely to impede the mission.
While the issue that the SEC is trying to address, climate change, is one that divides opinion, the reality is that the final rule it has promulgated is not one that advances any of the SEC’s three statutory goals. The SEC ought to leave the regulation of environmental issues to the agency with more experience in this field, the EPA, and refocus its own efforts on protecting investors in ways they need, maintaining efficient markets, and facilitating capital formation for all businesses. This issue is pending in the courts as the Eight Circuit will be hearing a consolidation of numerous challenges to the SEC’s climate rule in the coming months including, National Center for Public Policy Research v. Securities and Exchange Commission.
July 18, 2024