April 21, 2022
While the intention of the Climate Disclosure rules are sound, I have specific problems with the proposed rule and its implementation.
Most public companies view the Climate Disclosure rule as the biggest change in public company reporting since Sarbanes-Oxley internal control requirements. As with the implementation of any groundbreaking rule, companies will be forced to spend a material amount of money hiring consultants (generally from the big 4 accounting firms) to roll out a sound framework. Alternatively, companies can spend material amounts of money hiring an in house team, but in both events shareholders will feel the pressure on earnings related to the roll out of this rule. By imposing a rule this drastic, with a limited time to prepare, companies have no choice but to hire processionals who charge fees with limited options in a brand new space. Shareholders have no choice in the matter given every company is required to comply. Small companies or companies with tight margins now have a longer road to profitability and now may not have the ability to survive given the consulting fees and increasing audit fees over the long term. In the same way the staff is requiring this rule, could there be a cap on the amount that consultants and auditors may charge for this? Private companies, which may vastly impact the environment in a negative way, have no obligation under this rule and thus have no cost to bear.
My other major issue with this rule is it cannot be consistently applied across industries. It does not make sense to have a mortgage REIT and an oil company have the same requirements. The oil company has a clear impact on climate change, while the mortgage REIT does not. It is unfair for the SEC to assume that a mortgage REIT has indirect climate change impact because money may be leant to a sponsor who may be harming the environment. When it comes time to attempt to quantify the impact on climate change the mortgage REIT will attempt to contact their borrowers for certain metrics, all of which the borrower (likely a private business) will ignore. Audit firms will insist on getting the information and the business relationship between the lender and borrower will deteriorate, which in the long term is bad for the company and its shareholders. Certain businesses cannot expect their private company relationships to divulge information elated to their carbon footprint because the SEC suddenly requires it for public companies.
In my final and shorter point, there is simply not enough time to roll out the proposed framework. In my view, this rollout is more complex than 17a-5 for broker dealers and there was a longer rollout period for that standard. Although many fortune 500 companies may be prepared for this guidance, there are thousands of issuers who have not even heard of this rule. There should be some sort of market cap or industry consideration for the rollout of the proposed rule (oil and gas companies have a faster effective date than companies with indirect impact).
The SEC was formed to protect shareholders, but when I apply this rule to my business all it does is harm shareholders given the projected costs. If companies are required to spend capital on consultants and audit firms (private businesses who are not required to comply with this standard), why can't the requirement be to spend those dollars on actually improving the environment instead of creating disclosures to write about it? In the long run, I cannot understand how this rule will have a material impact on the slowing of climate change and the rule is inconsistently applied across industries. Audit and consulting firms are the winners, while public companies and their shareholders are the clear losers.