SEC and California enact tough new rules for corporate climate disclosure

Many political actors suffer from what the Internet calls “main character syndrome.” These officials think they are saving the world. In reality, they are abusing their power, too obsessed with being the heroes of the story to notice that they are the villains.

Few things distract these types from their work like climate change. A series of recently enacted regulations on corporate climate disclosure illustrate this point. Had they come out of Congress, such regulations (whatever their other flaws) would at least have started in the right place. Federal bills to impose such regulations have indeed been introduced, but they have failed. That hasn’t slowed down the Securities and Exchange Commission or the state of California, however. One is supposed to regulate the securities market, the other to govern itself. Yet each seeks to set climate policy for the entire country.

Securities laws are meant to help profit-seeking investors decide what to buy and sell. That’s why publicly traded companies are already required to disclose climate-related information to the value of the company. The SEC’s climate disclosure rule, which passed on a 3-2 party-line vote last spring and was the flagship measure of Democratic Chairman Gary Gensler, is something else entirely. It is “the culmination,” Commissioner Mark Uyeda noted in a dissent, “of efforts by various interests to . . . hijack the federal securities laws for their climate-related purposes.” In effect, “climate elevates above almost every other issue facing publicly traded companies.” Gensler has “bypassed Congress,” placed the SEC “beyond its reach” and “set a precedent for using (the agency’s disclosure regime) as a tool to effect social change.”

The rule requires public companies to identify, assess and report climate-related risks that could affect their operations, strategy, business model or financial condition. They must attempt to measure or predict the magnitude of such risks. They must disclose how their directors and managers track and monitor such risks, and they must explain what they are doing to address these issues. They must set out their own climate-related objectives and their progress toward achieving them. Although the rule claims to enforce materiality thresholds, it generally does not. The materiality of many required disclosures is taken for granted, and the dollar amounts set for others are pitifully low (e.g., costs as low as $100,000). The costs of determining which climate-related risks are material and therefore reportable will be enormous.

The rule covers both physical risks, such as extreme weather events, and “transition” risks, such as new green legislation or reduced demand for climate-unfriendly products. Companies’ discussions about such dangers will be plagued by speculation. What extreme weather events will increase as a result of climate change (and to what extent and where)? What climate-related regulations, lawsuits, or shifts in consumer attitudes will actually emerge? In the words of dissenting Commissioner Hester Peirce, companies will emit plumes of “climate disclosure spam,” much of it nothing more than “expensive guesses about the present and future.” (In calculating the cost of complying with the rule, the SEC came up with a low estimate of $2.3 billion per year.)

Some companies also have to measure and disclose greenhouse gas emissions from their own operations or from the energy they purchase. These are called Scope 1 and Scope 2 emissions, respectively. There are also Scope 3 emissions, which come from the activities of the company’s suppliers and customers. The SEC considered requiring disclosure of Scope 3 emissions but decided against it, which brings us to California.

California’s SB 253 and SB 261, passed late last year, don’t even pretend to cater to investors: They govern both public and private companies. Their goal, as one of their authors openly admits, is to pressure companies to “substantially reduce emissions.” They mandate disclosure of Scope 1, Scope 2 and Scope 3 emissions, and they reach every major company doing business, however minimally, in California. If a major meatpacking company sells pork to a handful of supermarkets in San Diego, it needs emissions data from the family-owned farms that raise hogs for it in Iowa. Even Governor Gavin Newsom understands that the laws are alarmingly onerous. “I am concerned,” he wrote in a signed statement for each, “about the overall financial impact of this law on companies.”

Legal challenges have begun. The SEC rule could be struck down under the major questions doctrine, which prohibits federal agencies from making major policy decisions without clear authorization from Congress. California’s laws could run afoul of the dormant Commerce Clause, which, though recently narrowed, prohibits states from unduly burdening interstate commerce. And both the rule and the laws raise First Amendment concerns because they force companies to speak out on a charged political topic, the better to subject them to pressure campaigns and political discipline.

The climate movement puts its own desires above societal values. Respect for the rule of law, in its eyes, is nothing compared to the greater cause of saving the planet. Hence the activists who block highways — and the presidents who attack the separation of powers. “If Congress doesn’t act quickly to protect future generations” by passing a cap-and-trade law, President Obama announced in 2013, “I will.” When Congress failed to do his bidding, Obama ordered the Environmental Protection Agency to come up with its own emissions-reduction plan. The Supreme Court ultimately blocked the plan in a landmark, big-picture ruling in 2022. By then, however, the Biden administration had declared its intention to “bring the full capacity of our agencies to combat the climate crisis.” It unilaterally committed the country to net-zero emissions by 2050. “We don’t need Congress,” the administration said. Gensler heeded the administration’s call and pushed through the SEC’s climate disclosure regulations.

Those who see themselves as protagonists rarely acknowledge boundaries or obligations. Actors and athletes meddle in politics or other areas far outside their expertise; students speak out on foreign affairs; schools, governments and corporations fixate on social-justice diatribes. The SEC can’t limit itself to regulating securities, and California can’t focus on its own very real problems. Depressing, but true.

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