With investors recently having lost $5 trillion in stock value, the latest proposal by the Securities and Exchange Commission (SEC) to saddle public companies with new disclosure requirements related to climate change has been met with a less-than-warm reception in most circles.  Many are rightfully concerned that the proposal’s high cost – as high as $10.2 billion the agency estimates – will ultimately hurt shareholders and that the insertion of climate change into financial disclosures will confuse potential investors.

One of the most critical voices of the proposal comes from within the SEC itself. Commissioner Hester Peirce, a member of the Commission since 2018 and a former staff attorney in the SEC’s Division of Investment Management, offered a scathing review of the new rule explaining that the proposal would vastly expand the disclosure requirements and compliance burdens for all public companies.

First, Peirce questions whether the SEC has authority to issue climate-related disclosure rules. “This proposal exceeds the Commission’s statutory limits…” she states.

She also points out that the Commission is applying a very broad assumption to all investors’ end goal. “The Commission seems to have assumed that today’s investor is driven by concern for environmental, social, and governance matters, not an anachronistic desire to earn returns on her hard-earned money,” Peirce observes in a statement on ESG investing, making the obvious point that most investors are interested in financial returns. In her dissent she notes that “…many calls for enhanced climate disclosure are motivated not by an interest in financial returns from an investment in a particular company, but by deep concerns about the climate or, sometimes, superficial concerns expressed to garner goodwill.”

Peirce also hits on an important problem with the Commission’s plan to include Scope 3 emissions in their proposed disclosure rule. In their proposal the Commission requires companies to disclose three scopes of emissions. Scope 3 includes a company’s indirect greenhouse gas emissions. However, as Peirce notes, “Scope 3 emissions reflect not the direct activities of the company making the disclosure, but the actions of the company’s suppliers and consumers… The reporting company’s long-term financial value is only tenuously at best connected to such third party emissions.” In the end, this data will be no more than an inherently speculative estimate that has little to do with the strength of an investment.

The SEC’s proposal is a misguided attempt to advance climate change policy that won’t actually help investors. In the process, the SEC’s regulatory overreach could saddle public companies with billions in new costs while doing virtually nothing to clarify investment options. For her part, Peirce, a seasoned veteran of financial regulation, is no fan of mixing climate change and securities regulation.  “Regardless of what one generally thinks of the SEC mandating hyper-specific ESG disclosures,” Peirce explains, “the proposals we are voting on today will fail of their purpose because they are not so much built on sand as they float on a cloud of smoke, false promises, and internal contradiction.”

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