Today the Securities and Exchange Commission (SEC) proposed new rules to compel publicly traded firms to disclose climate-related information.
The policy shift has long been anticipated and messaged by the Commission under the leadership of Chairman Gary Gensler.
According to the SEC, new rules would require firms to include certain climate-related disclosures in their registration statements as well as periodic reports. The information would include information about climate-related risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.”
The disclosed information would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.
Chair Gensler issued the following statement:
“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers.”
Congressman Patrick McHenry, the ranking Republican on the House Financial Services Committee added his opinion to the announcement, claiming that the Biden Administration is pushing its climate agenda through financial regulators because they don’t have the votes to pass it in Congress.
“The SEC’s proposal to require disclosure of information related to climate change that is not material for most companies is tone-deaf and misguided. I have long recognized the threat climate change poses to communities across America, and thoughtful climate policy—focused on the health and welfare of America’s working class—is long overdue. However, it is Congress’ job to set our environmental policy, not ill-suited and unelected bureaucrats. The SEC should focus on its core mission—protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation—rather than a far-left social agenda.”
The always eloquent SEC Commissioner Hester Peirce quickly distributed her position on the SEC’s climate-related policy, saying they are not the Securities and Environment Commission – at least not yet.
Commissioner Peirce stated:
“Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency. For that reason, I cannot support the proposal.”
Commissioner Peirce criticized the proposal as veering from the mission of providing investors with information on the financial performance of the company and its executives.
“The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.”
Historically, investors purchase securities in a company they expect to perform well financially, thus generating a return on investment. Today, the SEC is moving away from that paradigm to a direction of social engineering that may not align with investors’ desires. While interest has recently increased in the “ESG” or ” Environment, Social and Governance” sector of public markets, this is largely driven by the private sector and investor demand and not a dictate by unelected bureaucrats. The SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, while facilitating capital formation. Today, the SEC has decided to compel public companies to adhere to a political agenda as it adds a new role as climate policeman.
The proposed rule is available here.