Vanderbilt University Professor Joshua T. White, a former SEC economist at the Division of Economic and Risk Analysis (DERA), did a highly effective job of critiquing the SEC’s new climate disclosure rules during a hearing of the House Financial Services Committee.
The new type of disclosure falls under the SEC’s broad ESG initiative [Environmental, Social, Governance]. The Commission, under the leadership of Chairman Gary Gensler, has taken a very political turn in its pursuit of new rules, some of which may undermine industry and make being a public company less desirable.
Climate Disclosure mandates are questionable regulations that will dramatically increase the cost of being a public firm while generating little benefit as impacted businesses attempt to comply with the opaque issue. Even more worrisome, the new disclosure will foster the creation of a legion of consultants hired to greenwash a firm’s activities while encouraging spurious lawsuits from law firms recognizing a ripe target for financial settlements for an issue that is difficult to defend. In the end, consumers and investors will lose out once again as the Federal government looks to address a problem that simply does not exist.
White, an Assistant Professor of Finance and the Brownlee O. Currey Jr. Dean’s Faculty Fellow at Vanderbilt University’s Owen Graduate School of Management, analyzed the climate disclosure rules, concluding that the “adopted rule on climate-related disclosure will ultimately harm capital formation, deter companies from going public, reduce employment, and limit investment opportunities for ordinary investors.”
White served at the SEC from 2012 to 2018, so he is intimately acquainted with the securities regulator. Admonishing the Commission’s new rules, White said registered firms would incur higher costs of SEC reporting, which could be substantial, while outlining both the direct and indirect costs that will be incurred. In reviewing the SEC’s estimates of direct costs. White stated they are most likely “significantly” underestimating the cost of the climate disclosure rules, noting the Commission has made this error in the past.
As for indirect costs, climate disclosure could lead to “increased litigation risk” and “expanded legal liability.” The new disclosure could also reveal sensitive information that could aid competitors.
While the SEC claims that climate disclosure will help investors determine risk, White explained that ” the economic analysis fails to demonstrate how the proposal will generate comparable, consistent, and reliable disclosures.”
The new rules are “based on the premise that there is a market failure of registrants withholding information on material risks .” But White corrected this premise as “the current principles-based disclosure regime already captures material risks relating to climate change.”
Additionally, the SEC is ignoring its capital formation mandate:
“SEC has ignored focus on facilitating capital formation. Importantly, the SEC has a tri-fold mission to 1) protect investors, 2) maintain fair, orderly, and efficient markets, and 3) facilitate capital formation. Much of the rulemaking activity has focused on components of the mission not related to capital formation.”
White finishes his prepared remarks by stating:
“… the SEC’s climate-related disclosure rule likely has underestimated costs and overclaimed benefits. These amendments introduce highly detailed climate-related disclosure requirements, which I show are not supported by a thorough and balanced cost-benefit analysis. The final rule mandates extensive mandatory disclosures that will impose substantial direct and indirect costs on registrants.”
The net effect of the climate disclosure rules is fewer public companies, slower economic growth, and stifled capital formation. Companies will choose to exit public markets as they are too costly. The shrinking number of public firms is already a problem. Not exactly a win for the SEC.
Fortunately, Climate Disclosure rules are currently on pause due to legal challenges.
Yesterday, Democrat Senator Joe Manchin and Republican Tim Scott commented on a resolution that will over-turn the SEC’s overreach on climate disclosure. Senator Scott issued a statement slamming the SEC’s actions:
“The SEC’s mission is to regulate our capital markets and ensure all Americans can safely share in their economic success — not to force a partisan climate agenda on American businesses. This rule is federal overreach at its worst, and the SEC should stay in its lane.”
Senator Manchin echoed this sentiment, calling SEC’s action “un-American.”