Higher prices at the grocery store and the gas pump are hitting consumers hard. A recent rule proposed by the Securities and Exchange Commission (SEC) would make matters worse by turning public and private companies into collectors of climate information, a costly move that is sure to increase costs to shareholders and consumers alike.
This unprecedented proposal and its harmful effects on businesses large and small, as well as investors, cannot be understated. The SEC rulemaking would require all publicly traded companies to collect massive amounts of climate risk data. If companies disclose the most comprehensive but ill-defined emission data (as advocated by two commissioners), private companies and “mom and pop” operations such as farmers, which have never collected such data and typically have neither the budget nor expertise to do so, would similarly be forced to collect and share greenhouse-gas data or risk losing significant business.
The 500-plus page proposal mandates that company disclosures include greenhouse gas emissions across their footprint, including climate risk broken down by zip code locations. For many, this reporting must also include data throughout a product’s lifecycle, from how a product’s raw materials are sourced to how consumers dispose of it.
This requirement to provide emissions from up and down the supply chain means that not even private companies – typically exempt from SEC oversight – are safe from the long arm of the SEC. As noted in a comment letter submitted by seemingly every U.S. agriculture trade, in the SEC’s eyes, it matters little that there is fresh milk on grocery store shelves, as long as dairy farmers collect their climate data.
But the SEC does not stop there. Accounting rules are traditionally left to the Financial Accounting Standards Board (FASB), a private body with accounting expertise. The SEC abandons that tradition by requiring disclosure of the climate impact of each line item of companies’ consolidated financial statements if it changes the number by as little as one percent.
Notably, the rule applies to all public companies, regardless of how relevant environmental issues are to their business. Thus, a community bank is treated the same as a coal company. By treating these companies equally, the SEC dispenses with the long-recognized materiality standard that requires public company disclosures to be relevant to the reporting company and not simply the broader economy.
Through this rule the SEC threatens real harm to the investors they are charged with protecting. In the past, SEC filings could alert investors to the issues that management finds most important; now shareholders will be inundated with new data that may be completely immaterial to the businesses in which they invest.
Compliance with this rule will require more auditors, consultants to help with climate risk modeling, new systems for data collection, and increased litigation resulting in significant costs. These expenses will be passed on not only to shareholders but also consumers, who will foot the tab for the trial bar and climate data service providers that the current SEC believes should take precedence over investors saving for retirement.
Given the expansive costs resulting from this proposal, perhaps it is not a surprise that the SEC does not attempt to perform even a rudimentary cost-benefit analysis that considers the rulemaking’s true impact. The tens of billions of new costs mandated in this proposal come at a time when U.S. investors saw their portfolios lose $5 trillion in value in the first quarter of 2022. Consumer prices are the highest in four decades and energy prices continue to skyrocket, burdening businesses and consumers alike, a point noted by 40 Members of Congress who urged the SEC to immediately table the rule.
In today’s society the trending social or political issue of the day often takes center stage. The SEC is embracing this dynamic to the detriment of everyday investors and small businesses across this country. Given the many economic challenges our nation is facing today, the last thing consumers and small businesses need is a new overreaching and burdensome government mandate. The SEC should read the room – and comment letters submitted by investors on this proposal – and rethink moving forward with this rulemaking.
