From the outset of his political campaign, President Biden and his administration have been very clear about their mission to combat climate change, wielding the power of the Executive Office to institute policies that will impact how Americans consume energy. But in his attempt to follow through on this agenda, the administration may have gone a step too far, catalyzing serious mission creep by unelected bureaucrats.
Last year, Biden signed his “Executive Order on Climate-Related Financial Risk,” an order that charged several federal agencies, including the Securities and Exchange Commission (SEC), to assess climate risks as part of their future planning and policymaking. The idea was if financial institutions mandate more information related to climate be disclosed by companies, the investing public might change their behavior. And thus, the SEC’s “Enhancement and Standardization of Climate-Related Disclosures for Investors” rule was born.
This new rule would require companies to provide detailed information on all activities related to climate change, in addition to what they already disclose as part of normal business operations. This will include greenhouse gas emissions, environmental risks, and what the companies are doing to combat climate change.
The proposed rule creates inherent overreach by the SEC. As stated in a comment letter submitted by the Taxpayers Protection Alliance, “The role of the Commission should be to inform Congress about necessary rule changes that could advance appropriate solutions during the policy-making process and subsequently implement Congressional mandates in their respective areas of expertise.” In a joint congressional comment signed by 131 members of Congress, they share a similar concern, noting that “Congress did not establish the SEC to set climate policy nor to be the final arbiter of businesses' strategies to combat climate change, which is what these rules will do.”
Moreover, 24 state attorneys general agree and have questioned the SEC’s authority as to whether or not they can require information that is not “material.” West Virginia's Attorney General recently signaled he might challenge the SEC for departing from its traditional mission and attempting to become a climate regulator.
The SEC has also tried to include Scope 3 emissions into the proposal. Unlike Scope 1 and Scope 2 emission reports, which are already required in disclosures, Scope 3 emissions are a complex and likely non-material measure. Scope 3 emissions are a company’s indirect greenhouse gas (GHG) emissions produced by their activity. Indirect emissions are extremely difficult to measure and may not directly correlate with the company’s actions resulting in inconsistent data. This data is difficult to track and to ultimately verify because it is data outside a company’s control. In addition, it is possible for Scope 3 emissions to be double counted since third parties will have to be brought in to perform the tests. This is just one example of why these additional rules further complicate the process.
If the SEC’s goal with the climate disclosure rule is to better educate and protect investors, reports on indirect, immaterial data will not facilitate accurate decisions. In fact, they could deter investments in otherwise clean, efficient enterprises.
The new process a company would need to adhere by will come at an added cost. And unfortunately, the cost will land on investors and consumers. In the SEC’s official proposal, it is revealed the costs to companies would more than double in addition to the extensive information already required under the current rules. It is estimated that cost of disclosure for companies could go up to as much as $10.2 billion per year.
Transparency on financial information is positive, but overreach and over complication is not part of the SEC’s original mission. The SEC needs to stay within their jurisdiction and leave climate regulation to those mandated to regulate it. All resources should be focused on investing in and growing the domestic energy industry while making responsible environmental decisions. Lawmakers, stakeholders, and the courts should ensure the SEC does not overstep their authority by regulating companies and imposing massive new costs on business activity.
