SEC’s climate distraction

OPINION:

The House Financial Services Committee last week hosted Securities and Exchange Commission Chairman Gary Gensler for a 4½-hour oversight hearing. Lawmakers pressed Mr. Gensler on a proposed SEC rule that would require public companies to extensively disclose climate-related “risks” their business activities generated. It would also force them to analyze the climate risks generated by the activities of their suppliers and customers — known as “Scope 3” emissions.

The SEC is a financial regulator limited to a threefold mission: to protect investors, to maintain well-ordered markets, and to facilitate capital flows. It has now allowed itself to become distracted by environmental policy. Its assessment that such climate disclosures would be “material” to investors is dubious and deeply contested, not to mention that such broad Scope 3 emissions are effectively impossible to measure precisely.

The SEC is one of too many Biden administration agencies that have discovered backdoor authority to regulate on matters unrelated to their mission, particularly the environment. Examples of this can be seen in the injections of environmentalism into the Labor Department’s retirement-plan guidelines, the Treasury Department’s investment calculations, and at the Federal Reserve.

Moreover, the SEC has already imposed a more sensible framework that requires businesses to disclose material climate-related risks. Therefore, writes Benjamin Zycher, a senior fellow at the American Enterprise Institute, “We must ask what the SEC is trying to achieve.”

It’s simple. The agency hopes to nudge the industry toward green business practices. More perniciously, businesses’ climate disclosures would establish a paper trail that could one day become the predicate for financial divestments by environmentally zealous administrators of a government pension plan or private investment firm.

Even on strictly economic terms, the SEC’s proposal is ill-conceived. As put in last week’s hearing by Rep. Roger Williams, Texas Republican, the proposed disclosure regime “would have a major consequence for the businesses across the country, especially smaller entities who lose out on opportunities because they cannot afford the increased compliance costs that come with burdensome regulations like these.”

Industry has warned further that many companies would be functionally unable to comply with proposed Scope 3 disclosure mandates due to the costs and complexities of tracking emissions up and down supply chains. The Wall Street Journal reports that the SEC itself seems uncertain about how high accompanying compliance costs might be. Though the commission estimated the cost to a medium-sized to large company would be $530,000 per year (after the first year), “those numbers shouldn’t be considered a true cost estimate, a person close to the SEC [told the Journal], and were included solely to meet a rule-making requirement for regulators.”

The SEC is the progeny of President Franklin Roosevelt’s New Deal. In 1934 — the heart of the Great Depression — Congress established the watchdog to oversee securities markets, and Roosevelt chose Joseph P. Kennedy — father of John, Robert and Ted — as its inaugural chief. Following 2008’s Great Recession, the SEC recovered nearly $4 billion in monetary relief from more than 200 entities.

For all the commission’s flaws and missteps, the task of financial oversight is perhaps a necessary one, and gallivanting after environmentalist distractions degrades the agency’s capacity for competent governance and ignores its congressionally mandated mission.

It is perhaps more than coincidental that while Mr. Gensler’s agency has pursued unrealistic environmental legislation beyond its mission, the financial fiascoes of FTX and Silicon Valley Bank have unfolded.

What bridges the SEC’s historical and statutory mandate as a financial watchdog to its modern-day environmentalism is nothing more than mission creep.

• David McGarry is a policy analyst at the Taxpayers Protection Alliance.