The SEC Oversteps its Powers on Climate Change

Nearly two years ago, the U.S. Securities and Exchange Commission (SEC) proposed a rule that would force publicly traded companies to take climate change seriously by reporting on how climate change might materially affect their operations. The mandatory reports were to include, among other things, what actions they are taking to fight climate change, to anticipate and mitigate its potential impacts, to report on their emissions, and the emissions created throughout their supply chain, and any efforts they were taking to reduce emissions. This was a purely political action pushed by the commission’s three Democrat appointees.

Facing fierce backlash from investors, the public, and Congress, the SEC has delayed, for the moment, formally imposing the rule.

During the SEC’s delay, California, ever the leader in inane, job-destroying, consumer-costing policies, stepped in and passed its own similar law. As will be the case should the SEC finalize its rule, business and farm groups sued to block the law, in part, because it usurps the federal government’s constitutional authority to regulate interstate commerce by applying to companies headquartered outside the state, if they do business in California. The lawsuit also argues the law violates their constitutional right to free speech by compelling to them to take a position on the much-debated topic of climate change -- the state’s position, in fact.

Back to the SEC. Created in the aftermath of the 1929 stock market crash in order to protect investors from fraud and market manipulation, to maintain a fair and orderly market, and to facilitate capital formation, the SEC’s climate rule falls well outside its statutory authority. The SEC assumes that climate change does or will soon materially affect the operations of most, if not all, the publicly traded companies over which it has oversight. However, evidence for this is lacking.

As detailed at Climate Realism, Climate at a Glance, and Climate Change Weekly, there is no evidence that extreme weather events are becoming more frequent or severe; not hurricanes, floods, droughts, nor wildfires. Seas are rising, but no faster than their historic norm since the end of the last ice age. Even the U.N. Intergovernmental Panel on Climate Change (IPCC) says that it can’t detect, with high confidence, trends in extreme weather resulting from ongoing climate change, nor can it attribute any such events or trends to human actions, with high confidence.

If data doesn’t show climate change is making weather worse, and the IPCC can’t find such a signal, how can any individual company be expected to determine that at some point in the future “climate change” will “materially affect” its operations.

Companies located in areas that are historically prone to wildfires or hurricanes might be expected to take actions to reduce the likelihood that their operations will be impacted or compromised by such events, but this would be true regardless of climate change, and such actions would have to be weighed against the cost that such action would have on long-term profitability.

Such actions might include hardening infrastructure, improving supply chains, or even moving their operations to states or areas in states less prone to the types of natural disasters that might reasonably be anticipated to materially affect the company’s operations. Of course, the high costs of prior climate regulations are already driving companies to flee California, a trend its new reporting law will likely exacerbate.

And there’s the rub, “reasonably” be anticipated. No one, no company, no country can know what will happen 30, 50, or 100 years from now. Simply put, if a company reported in its public documents and to the SEC that it did not expect climate change to materially affect its operations, whether because its board did not consider climate change a serious threat based on real-world data, or because it had no way of anticipating the types of weather events that might occur in the future, where, or when, it would be honest. However, it is doubtful that such honesty of a conclusion on the part of a company would satisfy the SEC’s climate mandarins.

Indeed, although the rule would do nothing to prevent climate change, because no single company or industry substantially impacts global warming, it would open regulated companies up to potential enforcement actions from the SEC and lawsuits from activists for “improper filing,” if the SEC isn’t satisfied with the filing or the anticipated impacts do not occur but other unforeseen impacts do occur that do materially affect the company’s profitability.

Going even more beyond the bounds of its authority, the SEC’s proposal would require companies to account for Scope 3 emissions, which are indirect emissions outside of the particular company’s control, based on outputs from companies in their supply chain and from their customers. Any publicly traded company in the supply chain would already be covered by the SEC’s rule, so it would result in expensive, inefficient double counting.

The SEC has no authority over private companies or individual businesses, which means that it can’t require the operators of such companies to care or be concerned about climate change, much less account for their carbon dioxide emissions. Nor does the SEC possess the statutory power to deputize or empower officers of publicly traded corporations to act as agents of the state to seek information from other companies under its regulatory control, much less from individuals or companies not under its regulatory purview. The SEC can’t force companies to do on its behalf, what it has no authority to directly do itself.

The Competitive Enterprise Institute (CEI) just produced a comprehensive study addressing all these points in detail. Its author, Stone Washington, concludes:

The SEC’s rule… [i]f finalized… could be the most ambitious and expensive mandate in the history of corporate finance regulation.”

This 500-page rule serv[ing] as the centerpiece for the SEC’s agenda on environmental, social, and governance (ESG) investing… exceeds the agency’s statutory authority. It also undermines the agency’s existing disclosure-based framework.

Washington concludes the rule places the SEC at legal risk with the judiciary and the legislative branches of government, because “[t]he agency not only stands in defiance of Congress, it also ignores established judicial precedent by redefining the US Supreme Court’s interpretation of ‘materiality’ in corporate disclosure.”

In the end, the SEC should leave climate regulation to Congress, and get back to its job of collecting and publicizing financial disclosures with an eye toward fraud or market manipulation. Moreover, California’s rule should be struck down by the courts. No state has the right to force companies to take climate change seriously or advance the state’s concerns about climate change.

H. Sterling Burnett, Ph.D., ( is director of the Arthur B. Robinson Center on Climate and Environmental Policy at The Heartland Institute, a non-partisan, non-profit research organization based in Arlington Heights, Illinois.

Image: SEC

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