SEC takes on climate

From March 21 SEC press release, covering the 510 page proposed rule on climate disclosures. (The colleague who pointed me to this describes that as "a good deal shorter than many such exercises!") 

The Securities and Exchange Commission today proposed rule changes ... The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.

Wow, just wow. Later, 

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.

Why is this noteworthy? Remember, the SEC like other financial regulators is supposed to be in the business of relating financial risks. It is not supposed to be in the business of deciding and implementing climate policy. The pretense in this game has been, oh, we're not doing climate policy, we're just making sure that companies disclose (and, at the Fed, banks are not exposed to) risks. Financial risks. The climate might change, and the company goes out of business sorts of risks. 

What does calculating (nearly impossible, including upstream and downstream) and "disclosing" greenhouse emissions themselves, including emissions from purchased energy is a different story. 

How does a financial regulator have the authority to do that?   Aha, "which have become a commonly used metric to assess a registrant’s exposure to such risks." Don't you love passive voice? Now, just what connection is there between, say, a refinery's CO2 emissions, including those of the electric company that it buys power from, and the emissions of the truck company that buys its grease, and the financial risk to the refinery? Does that "commonly used" metric make any sense at all? Of course not. Only, perhaps, political risk; that the SEC and other regulators might close down companies based on CO2 emissions. I hope that people involved in this debate will seize on whether "have become a commonly used metric to assess a registrant’s exposure to such risks" is true, and whether it makes any sense at all. 

Commissioner Hester Peirce's response "We are Not the Securities and Environment Commission - At Least Not Yet" is wonderful, and detailed. 

The funniest  part: 

My statement is rather lengthy, so I will turn my video off as I speak; by one estimate, doing so will reduce the carbon footprint of my presentation on this platform by 96 percent.[2]

Serious points: 

The proposal turns the disclosure regime on its head.  Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes.  How are they thinking about the company?  What opportunities and risks do the board and managers see?  What are the material determinants of the company’s financial value?  The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies.[1]  It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks.  It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.

A big point  

I. Existing rules already cover material climate risks.

Existing rules require companies to disclose material risks regardless of the source or cause of the risk.

SEC rules require disclosure of any "material" financial risk, whether climate, weather, political risk, nuclear war (remember that? Maybe there is something more "existential" than climate!), changes in customer demand, difficulties in getting supplies, and so forth. If we're doing more on climate, it almost necessarily means stepping out of the "material risks" role .

II. The proposal will not lead to comparable, consistent, and reliable disclosures.

... The proposal does not just demand information about the company making the disclosures; it also directs companies to speculate about the habits of their suppliers, customers, and employees; changing climate policies, regulations, and legislation; technological innovations and adaptations; and changing weather patterns. 

To my complaint that changes in weather are just tiny risks, the usual answer is that "transition risks," mostly regulatory risks are the real issue. Pierce:

Required disclosures of so-called transition risks also present these challenges.  The proposal defines “transition risks” broadly as:

the actual or potential negative impacts on a registrant’s consolidated financial statements, business operations, or value chains attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks, such as increased costs attributable to changes in law or policy, reduced market demand for carbon-intensive products leading to decreased prices or profits for such products, [JC: how about skyrocketing prices of carbon-intensive products due to regulatory strangulation of supply, like look out the window?] the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, reputational impacts (including those stemming from a registrant’s customers or business counterparties) [JC: disclose that the twitter mob might be after you] that might trigger changes to market behavior, consumer preferences or behavior, and registrant behavior.[35]

Transition risk can derive from potential changes in markets, technology, law, or the more nebulous “policy,” which companies will have to analyze across multiple jurisdictions and all across their “value chains.”  These transition assessments are rooted in prophecies of coming governmental and market action, but experience teaches us that such prophecies often do not come to fruition.  Markets and technology are inherently unpredictable.  Domestic legislative efforts in this context have failed for decades,[36] and international agreements, like the Paris Accords, have seen the United States in and out and back in again.[37]  

I.e. make up what the regulators want to hear. 

VI. The proposed rule would hurt investors, the economy, and this agency.

Many have called for today’s proposal out of a deep concern about a warming climate and its effects on the planet, people, and the financial system.  It is important to remember, though, that noble intentions, once baked into complex regulatory plans, often have ignoble results.  This risk is considerably heightened when the regulatory complexity is designed to push capital allocation toward politically and socially favored ends,[61] and when the regulators designing the framework have no expertise in capital allocation, political and social insight, or the science used to justify these favored ends.  This proposal, developed under these circumstances, will hurt investors, the economy, and this agency. 

The proposal, if adopted, will have substantive effects on companies’ activities.  We are not only asking companies to tell us what they do, but suggesting how they might do it. [my emphasis]  The proposal uses disclosure mandates to direct board and managerial attention to climate issues.[62]  Other parts of the proposal offer even more direct substantive suggestions to companies about how they should run their businesses.  For example, the Commission suggests that a company could “mitigate the challenges of collecting the data required for Scope 3 disclosure” by “choosing to purchase from more GHG efficient producers,” or “producing products that are more energy efficient or involve less GHG emissions when consumers use them, or by contracting with distributors that use shorter transportation routes.”[63]  And the proposal suggests options for companies pursuing climate-related opportunities as part of a transition plan, including low emission modes of transportation, renewable power, producing or using recycled products, setting goals to help reduce greenhouse gas emissions, and providing services related to the transition to a lower carbon economy.[64]  

If you thought Russia's invasion of Ukraine, its effect on energy prices, our pathetic begging to Iran, Saudi Arabia, and Venezuela to open the spigots, had made a dent in America's self-destructive climate policy--shut down domestic fossil fuels before alternatives are available at scale -- you would be wrong.  

(Thanks to a  colleague who pointed me to these releases.)