In March, the Securities and Exchange Commission (SEC) passed a final climate disclosure rule that would force publicly traded firms to disclose climate-related risks to their business. But after a suite of legal challenges, the SEC decided to pause the implementation of its new rule to deal with the lawsuits. It’s not surprising storyline given compliance costs were estimated to double for publicly traded companies, which will help independent auditors and opportunistic AI startups increase their business, but hurt smaller companies who cannot afford these added costs.
Moreover, if the cost of compliance becomes too high, firms may find it advantageous to merge and consolidate—similar to the massive regulatory response after the financial crisis. Research shows that small firms with high regulatory costs are more likely to be acquired by firms in the same industry.
Fortunately, this rule has sparked considerable backlash—the public submitted over 24,000 comments, the most ever for an SEC rule, and at least ten states have sued to stop it. These suits are mainly due to the SEC's lack of congressionally mandated authority to venture into climate regulation. Specifically, the two main legal hurdles that the SEC faces in these lawsuits are the major questions doctrine and the non-delegation doctrine. The former ensures that matters of significant importance remain within the purview of Congress, while the latter scrutinizes the extent of authority delegated to regulatory agencies.
By requiring public companies to disclose their emissions, including indirect emissions from suppliers and transporters, the SEC extends its intended mandate of safeguarding investors and ensuring fairness in securities markets. Such overreach jeopardizes established business practices, stifles innovation, and unfairly burdens companies that already employ internal mechanisms to manage their climate impact according to their specific needs.
In fact, 90% of the top 500 firms in the Russell 1000 index and 80% of the S&P 500 companies already volunteer climate information in their financial reports. For the companies that do not choose to report the impact of greenhouse gases or climate, it is likely because it is too costly to gather climate information from all of their suppliers. This means it is not in the best interest of these firms to report this information or they already would be doing so.
Forcing firms to report climate information is estimated to cost small firms over $400,000 per year and may even force firms to change their supply chain solely for the purpose of legal compliance, as opposed to economic efficiency. To share compliance costs, publicly traded firms might merge. Ultimately, reduced competition negatively affects both consumers and shareholders, a concern acknowledged by the U.S. government across multiple industries.
A further economic contention is the redundancy of the SEC's climate disclosure rule for a large segment of publicly traded companies—banks. There already exists stringent, and ever-changing, stress testing protocols that already encompass operational risks—including those related to climate change. These protocols are rigorously examined by both internal risk managers and regulatory bodies like the OCC, FDIC, and Federal Reserve. Thus, the SEC's intrusion into this domain appears unnecessary and risks duplicating efforts already underway in other regulatory spheres.
In light of these concerns, it is imperative for Congress to intervene and assert its oversight to rein in regulatory agencies like the SEC. Such action would not only prevent regulatory creep, where agencies exceed their intended scope, but also ensure that agencies operate within the confines of their statutory authority moving forward.
Failure to do so risks a heavy compliance burden on publicly traded firms and damaging consequences for shareholders, consumers, existing supply chain partnerships, and the economy.
