Monday, March 21, 2022

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.) 

19 comments:

  1. what Democrats do...has ZERO to do with fixing problems...just reasons to Extort money
    Warren Buffett....Democrat backer
    "For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit."

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    1. It reminds me of WEllington who was opposed to trains because it let "ordinary people get around unnecessarily"

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  2. I live near NYC...I have not attended a party in 5 years without some ex-banker telling me how he is MAKING a killing on renewable deals!

    If you wanted to lower CO2...bang for buck is first reduce usage, 2nd Nuclear power, solar and wind operate around 40% of the time...and our terrible solutions!

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  3. --Judenstern! In more local practice, a method of recreating the Salem witchcraft trials.

    --The federal government is pursuing contradictory policies, or wishes or rhetoric, on energy prices and the environment. That needn't bother politicians who appeal to one or the other or both interest groups. And it doesn't. The [political] chickens will surely come home to roost, but not just yet.

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  4. The following thoughts were provoked by an abridged review of the 510-page S.E.C. document: "The Enhancement and Standardization of Climate-Related Disclosures for Investors", [https://www.sec.gov/rules/proposed/2022/33-11042.pdf].

    The proposed rules will have an effect similar to the effect that "Sarbanes-Oxley" had on registration and new public listings, i.e., negative.

    Apart from the obvious creation of demand for more accountants and corporate lawyers, the proposed rules will increase the potential liability of corporate boards of directors and executives and officers of registrants.

    The level of detail stipulated in the proposed rules will give rise to costs that will likely outweigh the possible benefit that the rules are intended to achieve.

    The time horizons for the projected "likely material effects" are not specified, but comments are invited on whether the proposed rules should specify ranges (in years) for "short-", "medium-", and "long-term" horizons. The rule notification suggests 1-3 years or 1-5 years for short-term material effects, etc., up to and including 40 to 50 years for long-term material effects. This begs the question of the reliability of forecasts out to those horizons and the difficulty of determining the probability of events that would give rise to future "likely material effects" that would require disclosure under the proposed rules. A new caste of "fortune tellers" will be needed to foretell those events and the probability of occurrence.

    It is easy to imagine that firms adversely affected by the proposed rules will soon be considering de-registration. The proposed rules cover foreign corporations registered with the S.E.C. Those foreign corporations may soon be considering de-registration. Private corporations that may have been considering going public in the U.S. will now have to re-consider those plans if the proposed rules impose onerous filing requirements (cf. "Sarbanes-Oxley").

    The evident absence of balance between the cost of preparing the disclosures required under the proposed rules, and the alleged benefits accruing to shareholders from those required disclosures will need to be addressed by the Commission if it is to meet its legislative mandate.

    Administrative law in the U.S. is increasingly burdensome. At some point, the attractiveness of U.S. markets to corporations seeking raise risk capital will decline. We may be witnesses to that decline in the coming years.

    The trend towards "going private", exemplified by Dell Computer, may be given a boost by the proposed rules. At a minimum, as noted earlier, corporations will find it increasingly difficult to recruit qualified candidates for membership on corporate boards of directors, officers and executives.

    What will the industrial basis of the United States look like in ten, twenty, or fifty years from now? Will manufacturing be outsourced to Asia to the extent that no sizeable manufacturing base is present in the U.S.? To avoid having to report Scope 3 emissions (upstream suppliers' and downstream distribution chains' and customers' emissions), corporations will refrain from making commitments to reduce their Scope 1 and Scope 2 emissions. Is this a desireable outcome for these proposed rules?

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  5. This doesn't even address the best/worst part. Since almost anything now can be deemed to be securities fraud, crafty lawyers for climate activists will take advantage of the necessarily sweeping but nebulous disclosure calculations to assert fraud claims against disfavored companies and industries. The nuisance will cost defendants millions to defend. Same as it ever was.

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    1. In my nearly 40 years of reading SEC disclosures, the only purpose for imposing such nebulous disclosures is to feed the plaintiff's bar--another area for plaintiff lawyers to go after companies with so-called strike suits. Shameful as it is obvious.

      There will never be sufficient disclosures to satisfy the plaintiff bar because stuff happens, the future is not known and cannot be known. Looking backwards, as these lawsuit do, is a con.

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  6. This looks like a data grab - not entirely bad if we want evidence based policies. But I figure it'll just be another form of accounting where 2 + 2 = fish. I don't think it'll be good data.

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  7. Curious. After Raskin withdrew as Biden's Fed nominee over a clash about her climate views. Hayek put it best. "Pretense of knowledge." SEC regulators can't have all the information necessary to implement this nonsense. Thinking on the margin, how are firms to know the habits of their suppliers and customers? In the real world of unpredictability the disclosures demanded by the SEC introduces more risk into capital markets. The cost of compliance for a hedge fund managing a billion dollars costs around six million dollars a year. the opportunity cost has to be the market rate of return. When implemented, I suspect compliance costs will substantially increase.

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  8. I am very happy to be retired from my former trade of corporate lawyer. One of my tasks was preparing my clients annual SEC filings. My clients were small public companies. One of them was a chain of 20 to 30 sitdown restaurants in the "casual dinning" sector (not fast food not white table cloth).

    They probably could have disclosed how much natural gas and how much electricity they purchased every year, but telling you what their emissions were? Good lord, they were chefs not engineers.

    But the idea of disclosing: "GHG emissions from ... downstream activities in its value chain" is downright funny. "We estimate that the food consumed in our restaurants produced 100,000 pounds of poopoo and 100,000 gallons of peepee. Additionally we sold 50,000 servings of bean chili that produced 10,000 cubic feet of intestinal gas containing 70% methane which is a very potent GHG.

    Our government is being run by lunatics. It is not a good feeling while the Russians are brandishing nuclear weapons while they murder innocent civilians.

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  9. The Fed and SEC entering climate policy-making...seems like using a hammer to garden with.

    I have an idea. If we wish to reduce carbon emissions, let us tax fuel consumption. Preferably in exchange for lower wage taxes...but hey, why reward productive behavior?

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  10. This seems to mirror the conflict minerals disclosure which seems to be required of all companies, given the number of annual reports with a section that basically says "we don't manufacture anything so don't use minerals."

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  11. Barron's sees that the SEC is using regulation to dictate climate policy:

    https://www.barrons.com/articles/sec-climate-risk-disclosure-rule-51647880796
    "SEC Unveils New Rules to Combat Climate Change"
    By Lauren Foster Follow
    Updated March 21, 2022 6:07 pm ET / Original March 21, 2022 12:41 pm ET

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  12. Thw Western world has been going mad for decades, this is just an extension of the self-destructive trend.

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  13. This really seems like an overreaction to disclosure rules. I would understand such criticisms about a extensive regulation of alleged "climate risks", but this outcry just because companies will be required to disclose their environmental performance is excessive and sounds more like a pretext for anti-climate regulation than a serious point of substance. ESG investing is a real thing, whether you like it or not. And ESG investors need information on environmental performance of companies. What is wrong with giving such investors a sound information basis? This allows better matching of demand and supply. Since when is Mr Cochrane against efficient markets?

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    1. Clearly, you are somebody who has no concept of how difficult, expensive, and painful the exiting disclosure regime is. I was paid hundreds of dollars per hour by my clients to write and file disclosures.

      They provided me with information, but you have no concept of how incapable the accounting staffs or the operational line were of writing a simple English sentence. I had to translate their gibberish into English.

      Further, executives of companies are always long on the companies and are emotionally incapable of the distance necessary to write compliant disclosure. I had to diplomatically talk them into accepting that there are risks inherent in their businesses that must be disclosed.

      Further the staff of the SEC, which is composed of young lawyers who are pathetically ignorant of anything in the real world, and have a costless option, which they often exercise for the sheer pleasure of it, to be complete rectal fistulas about meaningless trivia, can penalize the company. I had to write the most amazingly grovelling letters to young sheep dips to get them to dismount their high horses. IRL, I would have berated them with the Anglo Saxon terminology they so richly deserve. Even 25 years later my blood boils when I recall those encounters.

      All of that is about the cost and difficulty of the existing regime before the social justice warriors took over the SEC. But the proposed regime goes far beyond that. Figuring out what a company's direct emissions are is difficult. The company that uses lots of rented properties may not get direct utility bills. Figuring out the emissions created by energy providers is a task far beyond the competence of most issuers. And the emissions created is just risible. See my comment above.

      I am starting to think that letting the Ruskies nuke Washington in return for withdrawing from Ukraine would be a win win.

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    2. This will not give investors sound data it will simply cost companies money to report and thus reduce efficiency

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  14. I lost 7 figures on HQS, a microcap Chinese tilipia farm on AMEX. Total fraud. SEC did nothing. Worthless. CEO, or anyone else didn't even get their wrist slapped.

    https://www.sec.gov/Archives/edgar/data/857073/000119312510207346/dex991.htm

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