OPINION:
After two long years of anticipation and the receipt of thousands of comment letters, the Securities and Exchange Commission has approved its final climate disclosure rule – carrying with it a regulatory punch in the nose to Main Street America.
The March 2022 proposed rule was so astronomically egregious and transparently unenforceable that the SEC was forced to dial back some elements, including a requirement that public companies report greenhouse gas emissions from their downstream suppliers.
Unfortunately, the rule maintains the same egregious overreach and is built on the same faulty premise, carrying the same market-distorting consequences.
By mandating public companies report on physical climate-related risks, companies must analyze and disclose the myriad of potential long-term risks of climate change to their balance sheets. Physical risks include adverse impacts from severe climate events, such as long-run impacts from temperature and sea level changes. These disclosures will be inherently speculative – relying on theoretical modeling and educated guesswork to draw a line from climate change to the direct impact on a company’s bottom line.
Public companies know better than to guesstimate SEC-mandated financial disclosures. To assess their own physical risks, public companies will have to collect information from their value chain. Small businesses, manufacturers, farmers and ranchers, and any business that is a supplier to a public company will be ensnared by this rule.
The rule even takes this a step further by requiring the disclosure of “transition” risks. Transition risks include the potential impact of climate-related laws or regulations, evolving consumer preferences, or any developments needed for a low-carbon economy transition. These risks are built entirely on speculation.
Would public companies face economic harm from a future pandemic? An unlawful invasion of a sovereign country by a belligerent nation? The results of the 2024 presidential election? Surely, these events hold some potential economic consequence for many public companies. But the SEC is rightfully not requiring companies to collect information and make forecasts based on their specific risks related to these events.
Disclosure is costly. The SEC must weigh the cost and benefit of establishing any disclosure requirements. Unfortunately, the compliance cost of this climate rule is only outmatched by the worthlessness of the disclosure.
In the most sympathetic analysis, one might argue that requiring these disclosures will encourage public companies to reduce their overall greenhouse gas emissions. This is misguided. Many companies do have climate-related goals and GHG reduction targets. A public company under this rule must now disclose whether it is meeting these voluntary goals, with the SEC acting as self-anointed climate cop.
To meaningfully curb the impact of climate change, we must instead advance policies to spur innovation and technologies that reduce GHG emissions. This requires collaboration between the public and private sector. Instead, the SEC is rewarding those private sector partners with a brand-new set of burdensome disclosure requirements.
Financial disclosures are an important tool to the SEC’s mission to protect investors and maintain fair, orderly, and efficient markets. Broadening these disclosures to include all sorts of climate-related risks distorts this tool, and needlessly inserts the securities regulator into the climate policy debate.
This ill-fated foray into climate regulation will be felt across Main Street America. Unfortunately, this rule was not written with Main Street America in mind.
U.S. Rep. Frank Lucas represents Oklahoma’s 3rd congressional district.
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