The Securities and Exchange Commission (SEC) has gone rogue. The commission has now finalized a rule this will force publicly traded companies to report environmental information that has no relevance to the financial concerns that matter to investors. As much as environmental activists may want this information to force companies to embrace their political agenda, it is not the SEC’s job to require financially irrelevant disclosures, much less ask companies to talk about political and social issues like climate change.
The SEC’s new rule requires companies to provide public reporting of their annual greenhouse gas emissions. Even worse, the rule forces companies to tell the public whether they are taking steps to combat climate change and forces companies to hazard guesses about how climate change might affect their operations in the distant future. But none of this has anything to do with the SEC statute mission help investors understand the financial risks and benefits of investing.
The SEC was established to regulate public companies in the wake of the financial crisis that triggered the Great Depression. To this end, the law requires companies are required to disclose to investors “information that is material…to the extent it may be necessary to make the required statements, in light of the circumstances in which it was made, and not misleading.” For example, companies must provide information about market volatility, pending lawsuits, and significant changes in management, because this type of information could impact a company’s financial performance.
Information about whether a company prioritizes climate change concerns is categorically different from the type of information the SEC has long requested, for at least two reasons. First, the new rule requires disclosure at all levels by all large companies. This is a sharp departure from the “facts and circumstances” test long used by the SEC, which requires information that could affect individual companies’ financial performance, not environmental or social conditions.
Given its extraordinary unpredictability and a time horizon that spans decades, the impact of climate change on a given company is virtually impossible to assess. Requiring disclosure of greenhouse gases therefore tells investors nothing relevant to a company’s financial situation; will lead to unfounded speculation and mountains of information that investors cannot apply to investment decisions now.
Of course, none of this is news to supporters of the rule. Their goal is not to inform investors, but to force companies to toe the line on climate change. The new rule has nothing to do with financial considerations, but everything to do with political considerations. Like SEC Commissioner Mark Uyeda declared in case of dissent, “shareholders will take action [the] bill” to institutionalize an ESG department in every publicly traded company in America.
The SEC’s power grab is unprecedented and dangerous. While some investors may worry about greenhouse gas emissions, their desires do not justify requiring companies to disclose whether they are prioritizing climate change concerns. If this low bar could trigger SEC regulation, there would be no end to the topics the agency could require companies to report, including their positions on abortion, gay marriage and immigration. But forcing companies to parrot the party line on the environment is not the SEC’s job.
If the SEC is going to be transformed into an environmental and social thought police, the decision will have to come from Congress. Our Constitution authorizes only Congress to legislate and, above all, to assume responsibility for the consequences. As SEC Commissioner Hester Peirce declared“Entering non-economic matters involves trade-offs that only our nation’s elected representatives have the authority and expertise to make.”
The consequences of greenhouse gas regulation are serious. It will fundamentally change the SEC’s mission. It will force corporations to play a larger role in politics, something neither the major political parties nor most corporations seem to want. By inundating investors with irrelevant information, it will make them less informed about what really matters. It will distract companies from their core purpose of maximizing shareholder wealth and creating products that raise everyone’s standard of living. And it will violate the First Amendment by forcing companies to disclose information that is not intrinsically tied to their financial performance.
The Pacific Legal Foundation, where we work, will file a lawsuit against the SEC in the next few days to block the application of this rule and vindicate constitutional principles. Let’s hope the courts don’t allow this rule to remain in place.