As energy prices remain high, the Securities and Exchange Commission is moving forward with regulations that will shift the United States away from affordable energy generation and toward expensive energy sources that take years to grow on a large scale. The binding SEC rule is replete with costly disclosures based on unreliable and difficult to quantify climate risk data.
The SEC’s release of the new climate disclosure rule is normal for the Biden administration. By issuing this rule, SEC Chairman Gary Gensler is circumventing the authority of the SEC and administering the Democrats’ climate agenda through executive action without any input from Congress.
Fortunately, both House and Senate Republicans have voiced their opposition to the rule. Representatives Ted Budd (RN.C.) and Ralph Norman (RS.C.) sent a letter, along with 40 House members, urging the SEC to withdraw the rule. Sen. Kevin Cramer (RN.D.) also led a group of Republicans asking the SEC to rescind the rule.
The two letters argue that the SEC superseded its statutory authority and failed to establish that the disclosures required in the rule are material and “have been considered by the reasonable investor to have materially altered the ‘total mix’ of information available”.
The new climate disclosure rule is complex and requires more time for the public to provide in-depth feedback. Currently, the SEC offers excessively short comment periods for rulemaking and rigs deadlines by telling the public that comment periods could be “30 days after publication in the Federal Register” or 60 days after publication, “whichever is later”.
Under Gensler’s leadership, the SEC published most of its regulations with a comment period of less than 60 days. According to data compiled by Center Forward, 74% of Gensler’s rules have 30-day comment periods and only 11% are 60 days. Stakeholders have explicitly stated that short comment periods are unworkable. The Office of the Federal Register’s Guide to the Regulatory Process also wrote that federal agencies may want to provide comment periods of “180 days or more” for complex rules.
Clearly, the SEC is trying to ignore the public and craft consequential rules without considering the substantial impacts they have on households, retail investors, and the economy as a whole.
The data the SEC will ask companies to compile and submit to the agency is difficult to quantify. To name a few, the rule requires the disclosure of greenhouse gas emissions even if the public company is not directly involved (eg scope 2 and 3); disclosure of a climate transition plan and objectives; disclosure of climate risks on a company in the short term and long term; and risk management processes. Compiling this data to report in 10-K statements and other disclosures is a daunting task that may be based on limited or no information.
Climate-related financial risks are difficult to understand and quantify. A report published by the Bank for International Settlements discusses the difficulty of calculating climate risk information and its unreliability. The report states that in practice, “the range of impact uncertainties, time horizon inconsistencies and limitations in the availability of historical data on the relationship between climate and traditional financial risks, in addition to a limited ability of the past to act as a guide for future developments, makes the measurement of climate risk complex and its results less reliable as estimators of risk.
Other federal agencies also intend to force banks and other financial institutions to disclose their exposure to the oil and gas industry. The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Department of Labor, Federal Bureau of Insurance, City Council of Securities Regulation, and Commodity Futures Trading Commission are all pursuing initiatives to require quantification of ambiguous data on climate risks.
Democrats’ full-throttle press on the climate agenda will keep energy prices at historic highs and impose onerous disclosure and reporting requirements on public companies. Ultimately, this rule will only make it more expensive to operate businesses, which will pass the costs of goods and services onto individuals and households.
Lawmakers should oppose the SEC rule and support moves to ban the SEC from requiring companies to disclose emissions data.
Bryan Bashur is head of federal affairs at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.