After years of delay, the Securities and Exchange Commission is set to vote on whether to adopt new climate-risk reporting requirements Wednesday. After fierce criticism from the business community, the costliest part of the original proposal has been eliminated, but the new mandates are still an unnecessary burden, fall outside the scope of the SEC’s jurisdiction, and should be rejected outright.
If a company wishes to raise capital by issuing stock, it must register its securities under the Securities Act of 1933 and it must file periodic reports to the SEC pursuant to the Securities Exchange Act of 1934. The purpose of both these laws is to ensure that investors can make informed investment and voting decisions.
In addition to general information such as the financial condition of the company and management compensation, the SEC also requires disclosure of more specific information that could affect a company’s bottom line. For example, if a retailer signs a new long-term lease at a new location, that would have to be disclosed. But not everything needs to be disclosed. Renewing an existing lease for another year would not need to be disclosed.
The test for whether or not something needs to be disclosed has been the subject of literally decades of litigation including many Supreme Court cases. The court has developed a “materiality” test that applies to all new information that the SEC wants to request from companies. Importantly, the information required by the SEC must be business-related. A company’s political position on a controversial public policy issue is outside the scope of SEC jurisdiction.
In 2016, President Barack Obama’s SEC noted that “disclosure relating to environmental and other matters of social concern should not be required of all registrants unless appropriate to further a specific congressional mandate.” No further congressional mandate has come.
But President Joe Biden’s SEC was undeterred by this lack of mandate and issued a proposed rule in early 2021. It required companies not only to disclose their direct emissions (from factories and cars), but also their indirect emissions from purchasing electricity, and all emissions from customers and suppliers. By the SEC’s own admission, this new reporting requirement would have been more costly than all previous reporting requirements combined, adding $6.4 billion in compliance costs that ultimately would have to be paid by consumers.
The SEC has reportedly decided to scale back these requirements, including the complete abandonment of estimating the emissions for customers and suppliers. That is a good first step. Pinpointing the carbon emissions of every supplier and customer would have not only been extremely costly, but almost entirely speculative.
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Unfortunately, it appears that the SEC still intends to go through with the rest of the climate reporting rule. This would be a huge mistake. It is simply incompatible with the SEC’s core mission of obtaining materially relevant information for investors. If a company makes a long-term investment in electric vehicles to replace combustion engines, it already has to report the investment. If a company invests in solar panels to power a new factory, it already must file a report. Any new big investment, toward or away from clean energy, must already be reported. The only reason the SEC wants to add brand new emissions reporting is to give activist groups more ammunition to browbeat companies into making investment decisions that they find socially desirable.
The SEC’s job is to ensure investors have the relevant information they need to make informed financial decisions. They have neither the mandate nor even the authority to force companies to report if they are following the latest social fad.