Tuesday, March 22, 2022

SEC climate update

Three additional thoughts on climate financial regulation, building on the last post about the SEC  

1) A big question about SEC and related regulation. May the SEC regulate only on financial issues, i.e. "materiality," or may it regulate with larger social, economic, or political objectives in mind? 

The big squeeze now is to squeeze the latter in to the former. Disclose that the company doing something unpopular, even if it may have no financial effect, because someone might decide they don't like it -- either the twitter mob or future regulators -- and cause you trouble. (I am deliberately not using legalize here.) The carbon rules are not entirely new ground here, but so deep into that territory that the question is now loud and clear. 

2) "Disclosure" usually means revealing something you know. A perfectly honest answer to "disclose what you know about your carbon emissions" is, "we have no idea what our carbon emissions are." Back that up with every document the company has ever produced, and you have perfectly "disclosed." There is no asymmetric information, fraud, etc. 

The SEC has already required the production of new information, and as Hester Peirce makes perfectly clear, the climate rules again make a huge dinner out of that appetizer: essentially telling companies to hire a huge number of climate consultants to generate new information, and also how to run businesses.  

The fixed costs alone are huge. The trend to going private and abandoning public markets, at least in the U.S. will continue. The trend to large oligopolized politically compliant static businesses in the U.S. will continue. 

I would bet these rules wind up in court, and that these are important issues. They should be. 

3)  The SEC's timing relative to Russian sanctions makes an interesting one-two punch, as Walter Russell Mead points out. Suppose you're Brazil. Hmm. When will the U.S. decide to impose financial sanctions on Brazil for not following our ideas of climate policy, or the SG (social, governance) part of ESG? Maybe we should find alternative financial channels, pronto.  


  1. I'm yet to read the 500 page PDF, but am curious, do Scope 3 disclosures include the greenhouse gas emissions from employees? Like, hiring someone with a longer commute may result in higher emissions reported, underuse of work from home policies, or even use of labor in high emissions markets (USA) vs low emissions (take your pick of developing countries).
    If not, it creates a disadvantage from employing Capital vs Labor - if energy use on servers/forklifts/conveyor belts must be captured, this then creates a disincentive to employing such labor saving technologies if you're not capturing the carbon "savings" from not needing people to perform the procedures anymore. Another nudge against productivity growth.

    1. They do ask that commute emissions be included in Scope 3. This is inconsistent with other federal policy like the inability to deduct commute times as a business expense. Ultimately commute distances are a lifestyle choice. Strangely they don't ask about employees' other lifestyle choices. Like I'm sure the senior management take much more lavish vacations to Europe and Asia using company provided compensation. They also don't seem to demand tracking of the carbon emissions associated with employees' respiration or digestion which I find equally peculiar. Surely labor intensive industries are worse respiratory polluters and that needs to be disclosed! And are the companies optimally incenting their employees to sufficiently optimize their diets to limit digestive pollution?

    2. The thing that’s bizarre to me is that there are far worse environmental impacts from companies other than CO2. Those disclosures never show up at all in public filings and aren't mandated by the SEC either before or as part of these newly proposed rules. There’s no NOX emission disclosure requirement as an example. The difference is that really harmful emissions are highly regulated under authority of the EPA as authorized by Congress. The EPA doesn’t have the legal authority to regulate CO2 because it was never deemed sufficiently harmful by Congress to regulate. But that’s an unsatisfying position for the Greens which are now desperate to impose backdoor regulation through any other instrument of federal authority no matter how strained. Recent jurisprudence and the unchecked expansion of SEC dominion has been a big problem for a while, but if this continues along the SEC will likely be the most powerful federal agency in government with the ability to regulate near any tangentially commercial activity.

    3. Yes, the lifestyle choices were mostly what I was thinking of when raising the possibility of hiring people in high emissions localities vs low emissions. And ignoring respiration/digestion would fall into the same problem area of disadvantaging capital investment over employing labor: more machines = less food

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  3. OT, but maybe worth pondering as a similar type of over-reach.

    "ARLINGTON, Va. -- The Securities and Exchange Commission on Friday approved Nasdaq's groundbreaking proposal to boost the number of women, racial minorities and LGBTQ people on U.S. corporate boards.

    The new policy — the first of its kind for a U.S. securities exchange — requires most of the nearly 3,000 companies listed on Nasdaq to have at least one woman on their board of directors, along with one person from a racial minority or who identifies as gay, lesbian, bisexual, transgender or queer. It also requires companies to publicly disclose statistics on the demographic composition of their boards."


    There are lot of reasons to feel uncertain about this Nasdaq rule. Including...do we want to get into people's private sex lives?

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  5. "A big question about SEC and related regulation. May the SEC regulate only on financial issues, i.e. "materiality," or may it regulate with larger social, economic, or political objectives in mind?"

    We can ask that of any regulatory agency. Talk about marching through the institutions! The neo-marxists and their opportunist fellow-travelers have very nearly won.

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