April 8, 2022
Comments on the Securities and Exchange Commissions Proposed Rule for Enhancement and Standardization of Climate-Related Disclosures for Investors
17 CFR 210, 229, 232, 239, and 249
Submitted by
H. Sterling Burnett, Ph.D.
Director of the Arthur B. Robinson Center on Climate and Environmental Policy
at The Heartland Institute
The SECs proposed climate accounting and disclosure rules fall well outside its legal mission to protect investors from fraud and the markets from insider trading and manipulation.
The factors likely to materially affect the success or failure of publicly traded companies are best known to the officers and managers of the firms and funds themselves, not the SEC, other regulatory agencies, politicians, or self-appointed stakeholders, including climate activists, not actively involved in the relevant business.
The effects of climate change 20, 30, 50, or 100 years from now are unknown and unknowable. The projections of climate-simulating computer models of future conditions cannot be trusted. They have consistently overstated past and present temperatures, the most basic projections they have to make. The models have also consistently misidentified various climate conditions and weather events. Any projections made by climate modelers should be taken with a huge amount of salt.
The SECs proposed rules would require publicly traded companies to track and report on the greenhouse gas emissions resulting from their own operations and those of companies in their supply chain and the electric utilities that supply them power. In addition, companies would have to determine and report on how climate change is affecting their businesses now, how it is likely to affect them in the future, and what they are doing in response, including steps they are taking to reduce non-toxic greenhouse gas emissions.
These rules would take hundreds of millions, possibly billions, of dollars away from businesses core operations, to carry out the SECs mandate to predict future climate to account for its fiscal effect on business operations, and act as their brothers keepers by tracking their power companies and suppliers emissions as well as their own.
The SEC does not 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.
Much of the clothing sold by large, publicly traded retail chains and the electronics sold by publicly traded department, electronics, and cell phone stores and outlets is manufactured by overseas companies and shipped using foreign-registered ships. The sources for these items are not under the purview or control of the SEC and are unlikely to waste money tracking carbon dioxide emissions from their production activities, much less from the source of their electricity and supply vendors simply because the SEC wants their corporate American customers to expend resources tracking such emissions.
What about incorporated fast food giants and grocery stores? Regardless of whether their beef, chicken, pork, and seafood, the wheat that goes into their buns, and the vegetables and fruits they use or sell come from domestic producers or foreign sources, the producers are often going to be relatively small, unincorporated operations, not bound by the SECs mandate. That alone will severely complicate the corporations supply chain reporting.
The reports would likely be woefully incomplete, opening the companies up to SEC investigations for lack of compliance and transparency, and to activists protests or lawsuits for inadequate or incomplete reporting.
The corporate behemoths might attempt to force their foreign manufacturers and domestic or foreign farmers and ranchers to monitor or report their carbon emissions if they want to continue doing business with the corporate giants. This may be what the SEC wants the big companies to do: throw their financial weight around to make small producers meet SEC climate assessment standards. However, as mentioned above, the SEC cannot deputize corporations to do what the commission itself lacks the authority to do.
Producers could tell the incorporated outlets they will not track emissions because they feel it is too costly or unnecessary, selling their goods elsewhere, such as burgeoning markets in China, India, and Brazil. They could sell to countries where regulators, to the extent they exist at all, are more focused on helping companies make a profit and create jobs for their people than obsessing over distant, unknowable, and probably unwarranted climate fears. That would raise prices of all these goods in the United States by reducing supplies, further fueling inflation, which is already at a 40-year high. In addition, under this regime, we can expect the current U.S. supply chain crisis and increasingly empty shelves to become much worse.
Alternatively, the overseas and small domestic producers could attempt to track their emissions. Doing so, however, would add to their costs, and those added costs would certainly be passed on to consumers in the form of higher prices, just as the higher energy costs we are currently experiencing in response to the Biden administrations climate policies are responsible for a large portion of todays high inflation rate and rising consumer prices.
Because different companies often use common suppliers, to the extent that manufacturers within a set of companies supply chains are common and undertake greenhouse gas monitoring and reporting, double counting of emissions is likely to be the result.
Under either scenario, these policies would harm consumers. They would also harm investors, pension funds, and retireesthe very groups the SEC is charged with protecting.
Although private companies and businesses may be formed for any number of nonbusiness-related reasons unique to their owners personal desires and proclivities, publicly traded companies are formed to make a profit for their owners, even if the managers cite other reasons for a companys formation in their statements of incorporation and disclosures. Accordingly, the managers of publicly traded companies and funds should endeavor to maximize profits for their investors.
Pension fund managers typically have legal fiduciary responsibilities to do just that, not to undertake investment decisions based on nonbusiness considerations with a high likelihood of reducing portfolio returns. The politics of a companys or a funds managers should not enter into its business or investment decisions, unless the managers explicitly state in their articles of incorporation and public disclosures that business and investment decisions will be driven by a particular ideological point of view or set of political concerns. Many investors will avoid such funds.
If regulators, politicians, and activists want companies or funds to consider climate change risks, effects, and opportunities in its business and investment decisions, they can purchase stock or bonds issued by the company, as every other investor does. Then, at annual board meetings or other periodic company events, they can express their desires as co-owners. They can try to convince company or fund managers to consider potential climate change risks and rewards and monitor and reduce their greenhouse gas emissions.
Failing at that, they can introduce climate-related resolutions, offer like-minded candidates for the board of directors, and try to convince a majority of stock owners to support their resolutions, directives, and slates of candidates. Thousands of climate-related resolutions, and candidates for board positions focused on climate concerns, have been offered over the past few decades. Most have been soundly rejected by investors. This, not probably illegal SEC mandates, is the appropriate way for companies and funds to take climate concerns seriously.
As the SEC itself notes, many businesses are already tracking their carbon dioxide emissions and forecasting the effects of climate change on their operations. Other companies, believing climate risks are either unknowable or are unlikely to materially impact their business prospects, are choosing to ignore emissions or climate change as a business factor. They should be allowed to make that choice. Which course of action is better for any particular companys profitability and ongoing business operations? I dont know, and neither does the SEC.
Portfolio fund managers and others concerned about climate or sustainability matters can form their own companies and funds, complete with public stock offerings, to compete with the businesses they believe are not taking climate change concerns seriously enough. Thousands of such green companies and funds have been formed. This lets people express their concern for the environment directly through their purchases and investment decisions.
The SECs role in these matters should be limited to ensuring truth in advertisinga policing function. The SEC should not attempt to develop or enforce uniform standards defining what it means for a company to take climate change seriously. Instead, the SEC should simply require transparency from those companies and funds that profess to be green, climate-friendly, or committed to reducing their energy use and greenhouse gas emissions as a business strategy and a way to attract investors. In publicly available documents and disclosures, the companies and funds should be required to state specifically what practices they are undertaking to respond to climate change and how and on what timeline their efforts to reduce energy use and greenhouse gas emissions should be judged.
In addition to ensuring the transparent disclosure of allegedly climate-friendly practices and operations, the SEC should routinely monitor and police businesses claiming to embrace green policies, as they do with other promises businesses make to investors. The SEC should also respond to complaints from investors about companies failing to carry out their mission as stated and, working with the Department of Justice, ensure the companies officers, employees, and investors are not involved in illegal business practices such as insider trading.
The SEC has no expertise in climate change or any legal mandate in its charter to force companies to attempt to predict and respond to climate change as a risk to their operations, an arguably impossible task in any case. There is no nonpolitical justification for the SEC to require businesses to account for their climate risks, much less those of their business associates.
Simply put, the SEC lacks the statutory authority to compel climate change disclosure. Yet, even if it did, it would be a bad idea, placing investors and business at greater risk, not less. Moreover, the SECs proposal could very well raise First Amendment issues similar to previous efforts by the SEC to force companies to disclose particular information on environmental, social, and governance topics that have been struck down by federal courts.
The SEC should stick to regulating insider trading and false business claims and leave decisions about how to maximize business prospects in the face of potential, but unknowable, climate change to the owners and managers of those businesses. Individual investors and fund managers can decide for themselves whether a company is or isnt taking climate change seriously enough, and make their investment decisions according to their own risk/reward assessments.