SEC climate rule is a lose-lose for companies and climate leadership

Unsurprisingly, the Securities and Exchange Commission is facing legal challenges to its new climate rule after years of warnings from companies, investors, and activists alike. The novel rule, which forces publicly traded companies to report greenhouse gas emissions and exposure to other climate-related risks, goes well beyond the SEC’s mandate to protect investors and facilitate efficient capital formation. 

Now that the industry has had time to examine the 885-page rule more closely, businesses are raising concerns that the thicket of disclosure requirements creates significant legal risk for them and their shareholders, the very investors the SEC was created to protect.

Many of those concerns were on display at a House Financial Services Committee hearing last month. Liberty Energy CEO Chris Wright, whose company is one of the dozens of entities suing the SEC over the rule, testified that the disclosure requirements increase his firm’s liability risks while doing little to address climate change.

Wright emphasized that the SEC is used to dealing with the specificity of company balance sheets and has no experience with greenhouse gas emissions reporting. 

Under the rule, there is much ambiguity about what constitutes a “material” climate risk, especially regarding the disclosure of potential future climate risks. That makes it difficult for companies to comply with the disclosure requirement and blurs the line between essential financial information and broader environmental objectives.

A company’s emissions are challenging to measure and are, at best, “guestimates,” Wright told Congress. Businesses compelled to report such “guestimates” in their SEC filings will likely find themselves the target of environmental activists challenging the accuracy of those filings.  

Wright’s fears are not unfounded. Climate activists and environmental groups have targeted oil and gas companies for decades. SEC filings are yet another avenue for activists to meddle in a company’s strategy and are economically destructive. 

Liberty Energy and other businesses believe the SEC has exceeded its authority by regulating environmental matters. They argue that the Environmental Protection Agency, which already regulates greenhouse gas emissions from major sources, should handle this.

SEC Commissioner Mark Uyeda told Congress that the rule creates a “roadmap for abuse.” In his dissent to the SEC rule, Uyeda pointed out how various special interests can, and do, “hijack federal securities laws to advance their climate-related goals” by buying shares in public companies and then demanding those companies change their core business practices through the shareholder proposal process. While such changes may be in the public good, they typically fall outside the SEC’s mandate to safeguard shareholders’ investment and are generally irrelevant to a company’s core business. 

SEC disclosure requirements for public companies are meant to be limited to information “material” to investors’ ability to make informed investment decisions. But the SEC has overstepped by going past the materiality standard and requiring disclosure of information unrelated to financial matters and investor protection. 

Wright and others have also raised First Amendment concerns, arguing that mandatory climate disclosures violate a company’s right to free speech, especially if the disclosures are seen as controversial or speculative.

A requirement for disclosure of irrelevant information will increase the difficulties confronting investors when choosing between alternative investments, reducing economic productivity and making companies less competitive. It’s also likely to exacerbate shareholder challenges, raising production costs on the oil and gas upon which consumers depend.

The SEC climate rule will profoundly affect the oil and gas industry, discouraging investors from supporting American companies and potentially leading to a shift in demand toward private enterprises and foreign, often government-owned, production. This scenario is far from ideal, both economically and environmentally, since it will push emissions to corners of the world without the same vigorous environmental standards as the United States.  

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In fact, since 2005, the U.S. has reduced emissions from the power sector by more than 36% by switching from coal power to natural gas. This natural gas was inaccessible until companies such as Liberty Energy pioneered technologies such as directional drilling and fracking, which enabled access to new gas reserves. 

While a reasonable framework for disclosure of material climate risks and emissions makes sense, the SEC has overreached with this climate rule. It should be scrapped in the best interests of the energy sector and investors alike.  

Todd Johnston is the vice president of policy at ConservAmerica. Todd previously served at the Virginia Department of Environmental Quality and on committees with jurisdiction over environment, infrastructure, and energy issues in the Senate and the House of Representatives.