Securities and Finance Experts Worry that SEC’s ESG Requirements will Drive Shareholder Returns Lower, Push Prices Higher and Have a Negative Impact on Labor

The Securities and Exchange Commission is currently pursuing new rules under the auspices of ESG: Environmental, Social, and Governance. In March of 2022, SEC Chairman Gary Gensler explained they were aiming to require disclosure for firms on issues such as climate impact. He explained:

“The proposed rules would require disclosures on Form 10-K about a company’s governance, risk management, and strategy with respect to climate-related risks. Moreover, the proposal would require disclosure of any targets or commitments made by a company, as well as its plan to achieve those targets and its transition plan, if it has them. “

On April 11, 2022, a rulemaking proposal was submitted to the Federal Register stating:

“We are proposing to require registrants to provide certain climate-related information in their registration statements and annual reports, including certain information about climate-related financial risks and climate-related financial metrics in their financial statements. The disclosure of this information would provide consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.”

The 490-page document is currently accepting comments until May 20th after which point the Commission may move to enact the new rules. Hundreds of comments have already been submitted, with some in support and others against, as the additional disclosure burdens to firms may be profound.

A document published by two securities experts, David Burton and Norbert Michel, both from the Heritage Foundation, recently outlined who will actually bear the cost of the new disclosure regime, calling it an open question.  The two policy experts stated:

“One thing is certain: It cannot be corporations. A corporation is a legal fiction, and legal fictions do not pay taxes—people pay taxes. The corporate tax could be borne by corporate shareholders in the form of lower returns; owners of all capital (again in the form of lower returns); corporate customers in the form of higher prices; or employees (in the form of lower wages). It is, almost certainly, some combination of these. The economics profession has changed its thinking on this issue several times over the past four decades, but the latest —and highly plausible —consensus is that workers probably bear more than half of the burden of the corporate income tax because capital is highly mobile.”

In the long run, ESG would have the greatest negative effect on labor, Burton and Michel explain.

The Commission acknowledges companies, both large and small, will have to pay to accommodate these new disclosure requirements. Somewhat worryingly, the Commission admits the costs could be substantial:

“Direct costs would include compliance burdens for registrants in their efforts to meet the new disclosure requirements. These direct costs could potentially be significant; however, the incremental costs would be lower to the extent that registrants already provide the required disclosures. Indirect costs may include heightened litigation risk and the potential disclosure of proprietary information.”

The document continues:

“The primary direct costs that the proposed rules would impose on registrants are compliance costs. To the extent that they are not already gathering the information required to be disclosed under the proposed rules, registrants may need to re-allocate in-house personnel, hire additional staff, and/or secure third-party consultancy services. Registrants may also need to conduct climate-related risk assessments, collect information or data, measure emissions (or, with respect to Scope 3 emissions, gather data from relevant upstream and downstream entities), integrate new software or reporting systems, seek legal counsel, and obtain assurance on applicable disclosures (i.e., Scopes 1 and 2 emissions). In addition, even if a registrant already gathers and reports the required information, some or all of this information may be in locations outside of SEC filings (such as sustainability reports posted on company websites or emissions data reported to the EPA). These registrants may face lower incremental costs by virtue of already having the necessary processes and systems in place to generate such disclosures; however they may still incur some additional costs associated with preparing this information for inclusion in SEC filings.”

The Commission cites several anecdotal possibilities of cost but, in the end, no one really knows how high the fees will go, and they will be perpetual. A supposition does not equal empirical information.

One Commissioner has already voiced her concern regarding the possible over-reach of an agency that is ostensibly tasked with financial information and not social or political ambitions.

Commissioner Hester Peirce cautioned that the SEC was turning into the Securities and Environmental Commission, stating:

“The proposal … 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.”

Peirce adds that it is Congress’s responsibility to craft environmental policy, “not ill-suited and unelected bureaucrats.” She reminds everyone, that the SEC’s mission is “protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” ESG ambitions deviate from this path.

Somewhat disconcerting is the fact that the SEC created a Climate and ESG Task Force in the Division of Enforcement – more than a year prior to the submission of the new rules. So the ambitious ESG agenda has been in the works for more than a year, probably far longer.

Most people believe a clean environment is a positive objective. The question is how do you accomplish this goal. Is it by creating stultifying and costly new regulations with an expanded bureaucracy that will most certainly have unanticipated effects or should markets play a greater role. Which path is more efficient? And where is Congress in all of this?  The question is probably moot as the Commission appears to be determined to enact these rules which are probably beyond its statutory mission.

Burton and Michel predict the adverse social consequences of ESG will be dramatic and to the detriment of the economy:

“Management would be even less accountable to anyone since the metrics of success will become highly amorphous and constantly changing. Businesses would become less productive and less competitive. Jobs would be lost, and wages would grow more slowly. The social welfare cost of going down this road would be considerable.”




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