Russia’s assault on Ukraine is changing the world, except in Washington, DC, where the Biden administration is pursuing its war on fossil fuels as if energy security doesn’t matter.
The latest strike came Monday when the Securities and Exchange Commission voted 3-1 to advance a proposed rule requiring public companies to disclose climate risks. The proposal, which was issued with only Democratic votes, is contrary to SEC history, securities law and good regulatory practice.
Public companies are already required to report “material” events and risks, which the SEC defines as information that a reasonable person would consider material. SEC Chairman Gary Gensler redefines materiality as everything BlackRock and progressive investors want to know. The 510-page proposal will require public disclosure of risks to physical assets from climate change as well as government anti-carbon policies.
Companies will have to report greenhouse gas emissions generated directly by their activities (eg oil refining) as well as by their energy consumption. Companies will also have to report what are known as Scope 3 emissions from their supply chains and customers if they are material, which will be in the eyes of progressive investors.
For example, Exxon Mobil should report its direct emissions as well as those from fossil fuels burned to produce the electricity it uses. It may need to quantify emissions from the combustion of its products, the tankers that deliver them, and the manufacture of its rigs and plastic products when they degrade.
Scope 3 emissions do not have a clear definition. The agency says it “has not proposed a clear quantitative threshold for the determination of materiality” for Scope 3 emissions because it would “depend on the particular facts and circumstances, which would make it difficult to establishment of a “single” standard.
However, the general rule would impose a single regulation on thousands of public companies. A property and casualty insurer’s exposure to flood or fire prone areas is likely significant. Ditto for direct emissions from fossil fuel producers that operate in jurisdictions with carbon taxes or cap-and-trade systems. But carbon emissions are irrelevant to the financial performance of most public companies.
The SEC claims to have “broad authority to promulgate disclosure requirements that are ‘necessary or appropriate in the public interest or for the protection of investors’.” .
In 2015, the DC Circuit Court of Appeals ruled that an SEC disclosure warrant for so-called conflict minerals violated the First Amendment because it required speech. The government can compel companies to disclose information to prevent fraud or protect public health, but how do you compel companies to report greenhouse gas emissions?
As a fallback argument, the SEC says climate disclosures “will promote efficiency, competition, and capital formation.” They will do the opposite. They will impose new costs on businesses, discourage private companies from going public, and encourage some public companies to go private.
Mr. Gensler’s solution is to regulate private companies through the back door. To calculate their scope 3 emissions, public companies will have to oblige their commercial partners and private contractors to report their emissions. Companies will also have to have their emissions certified independently. This is another gift from the government to the big four accounting firms.
We’ll discuss the financial benefits of the rule for the ESG (environmental, social and governance) crowd another day. The main purpose of the rule is to make it easier for left-wing asset managers like BlackRock, public pension funds and litigators to intimidate companies. Public companies will be responsible for climate information that the SEC deems to be inaccurate or incomplete.
Mr. Gensler provides a “safe harbor” of responsibility for Scope 3 emissions, but there is no political safe harbor. Progressives will have a new weapon to hit corporations with. Democrats can’t get their climate agenda through Congress, so they’re using financial regulation to block fossil fuel investment. Vladimir Putin will be delighted.
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Appeared in the March 22, 2022 print edition as “Gensler Stages a Climate Coup.”