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Cato Analysis: SECs Proposed Climate‐​risk Disclosure

Cato Institute | Jennifer J. Schulp and William Yeatman | Jun 8, 2022

climate risk disclosures - Cato Analysis:  SECs Proposed Climate‐​risk Disclosure

While some environmental advocates, consultants, and asset managers selling “sustainable” investment products have found a myriad of things to love about the proposal, there are far more reasons to criticize the SEC’s bold move: it’s a menace that threatens harm upon financial markets, the SEC itself, and even the cause of environmentalism.

Proposed increase in compliance costs

Under the proposal, about 7,000 companies would have to report their “climate‐​related risks and impacts.” The SEC estimates that these new rules would raise the annual cost of compliance from $3.8 billion to $10.2 billion. That’s no small change. And the SEC’s estimates of $420,000 to $530,000 in annual expenses, including the services of climate modelers and emissions accountants, places a substantial burden on companies, particularly smaller ones.

SECs justifications fall short

  • First, the SEC says that it must “protect investors” from an ongoing “market failure” involving “difficulties locating and assessing climate‐​related information when making their investment or voting decisions.”
  • Second, the agency purports that it must correct “market inefficiencies” resulting in capital flows that supposedly do not reflect the true threat of global warming.

See:  NCFA Response to FINTRAC’s ‘Knee Jerk’ Regulations Requiring Donation Crowdfunding Platforms to Register and Comply with AML/ATF Legislation

Both claims fail the sniff test. There are no market failures here. Corporate managers should already account for “climate‐​related risks” (if any) while trying to maximize long‐​term shareholder value in highly competitive securities markets, and the SEC already requires disclosure of such risks where they are material to an investor’s decision making. The upshot is that the proposal is “missing…a credible rationale,” to borrow phrasing from Commissioner Hester Peirce, the lone dissenting voice on the SEC.

Duplication of work

The SEC is also duplicating another agency’s work. A major component of the proposal is a requirement that companies disclose their greenhouse gas emissions, yet the Environmental Protection Agency—actually tasked with protecting the environment—already requires emissions reporting. Even though EPA requirements capture 85–90 percent of emissions, the SEC seeks to require more detailed disclosures for public companies, perplexingly implying that investors’ needs are greater than the EPA’s. It’s hard to imagine a worse case of mission creep.

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