This week, the podcast had a special guest- Daniel Naim of Fennel Markets. We admire their mission and encourage you to check them out!
It’s so hot outside today that the ice cream man rolled right by without stopping—just stared my kid down while blasting “Cuckoo Waltz” and flashing his middle finger.
Even the Good Humor Man has his limits.
Granted, that’s anecdotal.
But here’s what’s not anecdotal. Last week was the hottest week on record since we began keeping track in the late 1800s.
And now, suddenly, for like no reason at all, the SEC wants to get on the whole climate change bandwagon. It’s like, c’ mon SEC—mind your own business. Just sit here and boil like the rest of us.
That’s what some lawmakers are saying, anyhow.
Stay in Your Lane. We’re Already Blocking This One.
Collaborating on an opinion piece in the Wall Street Journal, former SEC Chair Jay Clayton and current House Rep and Chair of the House Financial Services Committee, Patrick McHenry (R-NC) write that “setting climate policy is the job of lawmakers, not the SEC, whose role is to facilitate the investment decision-making process.”
“Setting climate policy is the job of lawmakers.”
Whether they wrote this sentence with straight faces is unknown.
Obviously, I trust Congress to make climate change laws like I trust Ted Nugent to be my pet sitter or Mike Vick to watch my pitbull.
With every year that passes, there is mounting evidence that Kevin Costner’s Waterworld understood the implications of global climate change better than today’s elected officials.
But this isn’t actually about climate change at all. This is about control.
As we’ll discuss here, Clayton, McHenry and their Congressional allies are doing their best to create an issue where none exists. Whether we believe climate change is real, exaggerated, or a great big hoax perpetrated by lizard people to stifle American prosperity is completely irrelevant.
This is entirely an issue of jurisdiction. The Commission is making rules. Any time those rules threaten the bottom line of certain powerful individuals and organizations, you can anticipate exactly this line of attack.
This is an attack on the right of the Commission to exercise its authority as a regulatory agency. And it is an effort to divide us on an issue that isn’t actually that controversial–higher quality, consistency and transparency of information for investors.
Like I said…this isn’t about climate change even if it is. It’s really a tug of war between the Commission and Wall Street. As McHenry demonstrates, Wall Street has plenty of proxies to help them pull the rope.
And that brings us to today’s discussion.
The SEC has proposed new disclosure rules related to climate change. But does the Commission have that right? Is this within the Commission’s jurisdiction? Opponents say no. But then, opponents say a lot of stuff. So let’s dig in here.
The Rules
In March 2022, the SEC proposed rule changes requiring public companies to report certain climate-related information and data as part of their broader disclosure responsibilities. Issuers would be required to report this information both as part of registration and periodically thereafter.
In its initially proposed form, the rule would require companies to disclose the following to regulators and investors:
The proposal is currently undergoing review, and it remains to be seen exactly which conditions will make it to the final version.
But the current debate is based on these conditions.
What’s the Big Deal?
Other than the rapidly heating planet and the fate of humankind…
The SEC’s new rule is based on the premise that climate change is already having an impact on the bottom line for companies of all shapes and sizes. This, in turn, makes information about climate change risk of material importance to investors.
But it’s essential to clarify here–the SEC is not staking out a position on climate change. It is not establishing a new regime where none exists. And the Commision is in no way appointing itself an environmental enforcement agency.
In fact, the SEC is operating in accordance with the long-standing view that disclosure is a foundational market principle. Our markets are built around disclosure. The SEC doesn't judge your disclosures. They simply require you to disclose.
It’s up to shareholders to make their own decisions based on that information. If you misrepresent that information, you can be sued and held liable for enforcement actions. This is known in some quarters as "capitalism."
So before we even give oxygen to the claims from those who oppose the new climate change disclosure rules, it is important to defend against a very deliberate conflation of issues.
Importantly, the rule is not one which requires compliance with environmental regulation. It only calls for disclosure. Nowhere does it suggest that the SEC would be policing firms for how they handle climate change risk…only for how they handle the reporting of that risk.
As for policing the risk itself…that is the job of the investing public.
And this is the core prerogative for the new rule. Specifically…
Investors Care About this Stuff
The strongest argument in favor of heightened and streamlined climate change risk disclosure is the simple fact that investors actually desire this information. Individual investors believe this information to be material when making decisions about the future outlook for registered and publicly traded companies.
An article from MIT’s Sloan School of Management found that “‘The tsunami of information and requests that are coming from investors demanding information today — and this has been a buildup for years — is tremendous,’ said Carol Geremia, president of MFS Investment Management and head of global distribution. ‘The fact that there’s potential to have clarity and consistency as everybody’s talked about would be incredibly welcome because right now it is a tsunami at every level you can imagine.’”
Whether investors care about the fate of the planet or they just view sustainable companies as a better bet doesn’t really matter…especially if you think the SEC has no business making climate change policy. All that matters is that this information would help investors make better-informed decisions.
Big Companies Already Report This Stuff
As both the SEC’s actions and the public’s desire for more information suggest, climate related risk and risk management will likely play a role in the future performance of publicly traded companies.
It turns out that lots of publicly traded companies already know this. According to The Conference Board, “More than half of S&P 500 companies disclose climate risks in annual reports; 71 percent disclose GHG emissions in their annual reports, sustainability reports, or company websites.”
But the same is not true of many smaller and mid-sized public companies. Conference Board reports that just 28% of the S&P MidCap 400 report GHG emissions.
And that’s kind of the Commission’s point. Climate-related disclosures are becoming the standard among industry leaders, but reporting is inconsistent and stratified. There are far too many gaps in the information available to everyday investors.
Europeans Already Report This Stuff
In some ways, this whole debate is borderline pointless. On January 5th of this year, the European Union’s Corporate Sustainability Reporting Directive (CSRD) went into effect. The result of the rule is that some 50,000 companies are now required under EU law to “disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.”
And just as with climate change itself, these local changes have global implications. Indeed, the Global Reporting Initiative notes that roughly 3000 U.S. companies and 1,300 Canadian companies will immediately fall under the sway of the new EU rules.
When you combine this with the number of companies who already see the economic value in climate change disclosure, the companies who fail to meet our rising standards risk disappointing investors and flagging behind their more innovative competitors.
So in essence, by failing to pass meaningful rules here, the United States would not be sparing its private industries the burden of climate change disclosure. We would merely be choosing to let regulators in other countries take the lead.
A Ploy Named Sue
Business leaders and members of Congress have been sharply divided on the SEC’s engagement on this issue.
Objections are partially couched in concerns over the cost of compliance, especially to smaller and mid-sized companies. However, the inevitable litigation over this issue will more likely rest on the argument that the SEC has no business regulating climate change policy.
That’s where Jay Clayton and Rep. McHenry have planted their flag. Their WSJ editorial explained that “Taking a new, activist approach to climate policy—an area far outside the SEC’s authority, jurisdiction and expertise—will deservedly draw legal challenges. What’s worse, it puts our time-tested approach to capital allocation, as well as the agency’s independence and credibility, at risk.”
McHenry is right about one thing. Legal challenges are likely. Since proposing the new regulations, the SEC has taken its time crafting the final rule. By the Commission's own report, rule makers are carefully considering arguments from all sides. The goal is to preempt as many of those legal challenges as possible.
But at the end of the day, the core objection is that the SEC has no business even uttering the phrase “climate risks.” And yes, Clayton and McHenry do put the term in derisive quoties. This means that any final rule will be met with legal challenge. This much, we have been promised.
Spirits in the Material
So how will the SEC fare against such challenges? Is it true that the SEC is overstepping its jurisdiction?
Bloomberg Law notes that “broadly speaking, when any public company information is material to investors, the SEC may require its disclosure. If climate-related disclosures would be material to investors, then those disclosures are already legally mandated under the SEC’s court-tested rules, subject to an economic analysis of the benefits and burdens under the APA.”
The very fact that so many individual investors view this information as material suggests that it is. For our view, that's sufficient rationalization.
But since that won't do in a court of law all by itself, it’s also worth noting that this type of rule-making actually aligns directly with a century-old disclosure regime.
Not to pull rank, but that’s way older than the making-shit-up-about-climate-change regime.
As SEC Chair Gary Gensler pointed out in the initial rule proposal:
“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.”
In other words, if this information that investors think they need to better understand their investment opportunities, the SEC is within its right to regulate disclosure of this information. And this has always been true.
A study published through Emory University confirms as much, noting that “A close review of the features of the traditional disclosure regime, many of them long forgotten, and of the features of the SEC’s rule, many of them distorted by the critics, suggests that the rule is in keeping with longstanding regulatory practice. In short, the SEC has the statutory authority to act, its motivations are neither improper nor novel, materiality, when properly understood, does not present an obstacle, and theories pertaining to “major questions” and “compelled speech” are misplaced in this context.”
To translate, it is likely that the SEC will clear the legal burden required to prove that it is acting within the limits of its well-established authority.
Don’t Act Like You Can’t Afford It
Another takeaway from the assessment above—there is a strong case that companies will shoulder the burden of compliance costs. The Commission does not deny this.
But to make an important point, the most important point really—global climate change is already imposing a heavy financial toll on private companies, investors, and the broader economy.
We’re not here to debate that fact. Those who feel otherwise are welcome to go blow their smoke at the Canadian wildfires.
But for those of us down here on red hot planet Earth–hurricanes, tornadoes, floods, wildfires, droughts, and heatwaves are costing us billions in property destruction, lost infrastructure, rescue and recovery operations, supply chain disruptions, shuttered businesses, and emergency medical services. Obviously that’s just the tip of an iceberg that’s rapidly filling our oceans.
So to those companies which would now bear the burden of hiring climate risk disclosure compliance officers—or heaven forbid—outsourcing this function to a third-party assurance consultant…you have our deepest sympathy.
Hooray Capitalism!
As we approach a final rule, and the likely legal challenges to follow, it’s important to stay ahead of the more deceptive language used by its opponents. In attempting to argue that the SEC has veered sharply out of its lane, Clayton and McHenry claimed that the Commission was attempting to set “climate change policy.”
This is not at all what the SEC’s rules mean.
The Commission’s new rules wouldn’t necessarily require companies to be better. They would simply give investors the information to choose the organizations that they think have better odds of survival and success.
If we as investors decide to punish companies who are attempting to seal our planet’s doom while rewarding companies working to reverse the impacts of global climate change…well isn’t that the beauty of capitalism?
Then we all get to say that free, healthy markets helped save the world. And we can do it with a straight face.
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.