Hirs: SEC’s Enhanced Climate-related Disclosures Are Unnecessary—Even According to SEC

The U.S. Securities and Exchange Commission (SEC) has released its rules for enhanced climate-related disclosures, which are due to be phased in following publication in the Federal Register. Across 886 pages, the rules call for companies to disclose material levels of greenhouse gas emissions, the impacts of potential climate-related weather events and actions taken to reduce emissions and protect against weather events.

To justify the new rules, the SEC cites multiple studies that have found an association between greater climate disclosures and higher stock valuations. The SEC’s work has already been done by the market! Following the SEC’s logic, those companies seeking greater valuations will make climate-related disclosures. 

So, what is the goal of requiring disclosures? In a departure from decades-long tradition, the SEC has not included a standard cost-benefit analysis on these proposed rules. It seems clear that the “cost” of these rules would go far beyond the accounting measures required to produce the reporting and could, in fact, make it easier for climate groups to sue any company over its greenhouse gas emissions.

The rules require companies to disclose their Scope 1 and 2 emissions. Under established conventions, Scope 1 emissions are those generated directly by a company’s business activities such as transportation fleets, process heat or heating for office buildings. Scope 2 emissions are indirectly generated, such as when a company buys electricity from a fossil fuel power plant. Scope 3 emissions are further removed from direct company control, generated by suppliers and customers. Obviously, a company has much less control over these sources of emissions and as a result, the SEC did not mandate Scope 3 disclosures. In the grand scheme of things, requiring Scope 1 and 2 reporting should provide a complete picture of GHG emissions for the economy.

The SEC states that the new rules will standardize disclosures across issuers for the benefit of professional and retail investors and argues that these disclosure requirements will fall across all public issuers, not just oil and gas producers—but there is a catch. There is little direct guidance for “standardization” of climate risk reporting.  

The SEC does not quantify benefits and costs of the new rules for companies, notwithstanding earlier comments to the SEC. These cost-benefit analyses have been required for federal rules and regulations since the Johnson administration in the 1960s. Federal courts may find that the lack of a complete benefit-cost analysis is enough to suspend implementation of the rules.  

Instead, the SEC argues the benefits of enhanced disclosure are demonstrated by studies that show “higher level of disclosures … associated with higher valuations.” But it is nonsensical to conclude that the entire market would enjoy a higher valuation due to more disclosures. If the cited studies are valid, non-disclosing companies are already penalized.

The SEC is similarly vague about the costs of these disclosures. The SEC omitted real-world examples of the incremental costs incurred by issuers who previously have met or exceeded the new climate-disclosure rules. Why? The subtext is important, also. The SEC states that the enhanced level of disclosures will increase litigation risk for issuers. First, the increased risk will arise because the disclosures will be filings that cannot be misleading under penalty of law. Second, and perhaps more importantly, the enhanced disclosures will make issuers publish data that was only previously available in litigation such as those climate lawsuits filed against Chevron, Exxon Mobil, Eni and other major oil companies. And oil companies are not the only targets of climate activists. 

Agriculture accounts for 10% of greenhouse gas emissions in the U.S. “Big Ag” companies know that plowing and tilling fields release carbon emissions. They also know that planting cover crops during the winter are effective carbon sinks. Livestock emissions—methane from feedlots—can be captured for renewable natural gas. Commercial and residential use accounts for 13% of emissions. Transportation accounts for 28% of greenhouse gas emissions. Separately, cement plants account for 8% of greenhouse gas emissions. Large source emitters will become targets for litigants and, because of the new SEC disclosure requirements, they will be providing the very data needed by the plaintiffs seeking to sue them.

In this particular matter, oil and gas producers can find allies across the industrial spectrum. The SEC’s rationale for enhanced climate-disclosure rules is weak and contradictory. If the courts are unable to stop the new rules, then Congress may act by withholding funding from the SEC. It is a high-stakes game for a wasteful, indirect approach to reducing greenhouse gas emissions.