The Security and Exchange Commission’s (SEC) rationale for its proposed climate risk-disclosure rule does not pass the laugh test. The SEC claims it seeks to protect investors from climate-related “transition” and “liability” risks—the financial losses climate policies and litigation could inflict on fossil-fuel companies and their shareholders. But the SEC ignores the easiest way to reduce climate policy risks—oppose rather than champion the Biden administration’s NetZero agenda.
If the administration and the wider environment, social, and governance (ESG) movement were serious about “protecting shareholder value,” they would repudiate the “climate crisis” narrative, expedite construction of fossil-fuel infrastructure, and oppose new taxes on coal, gas, and oil. Yet, they do the exact opposite.
Far from protecting investors, the SEC proposal would intensify the “transition” and “liability” risks facing fossil-fuel stockholders. Here are some predictable consequences.
Increased disclosure of companies’ greenhouse gas emissions and fossil fuel-related investments facilitates activist naming-and-shaming campaigns against “polluting industries.” It also invites shareholder resolutions to divest assets central to fossil-fuel companies’ business plans.
Risk disclosures can be spun or litigated into confessions that a company’s business model is unsustainable in a carbon-constrained future. That can scare away investors and lenders, who typically shun businesses that lack assets perceived to have durable value.
Declining capital and credit ratings can provoke shareholders to sue the company for fraudulently overpricing asset values. Such litigation can further restrict the company’s access to capital and credit.
In short, the Biden administration’s real goal is not to protect investors but to de-capitalize and de-bank fossil-fuel companies. Or, in President Biden’s words, the goal is “promoting the flow of capital toward climate-aligned investments and away from high-carbon investments.”
Proponents are apt to be disappointed, however, because climate-related risks are not as certain or dire as the SEC and other ESG advocates profess to believe.
As documented in CEI’s comments on the prequel to the SEC proposal, climate risk disclosure advocates typically hype the physical dangers of climate change. In case after case, the underlying analyses combine overheated models with inflated emission scenarios, producing unrealistically high warming forecasts. In addition, the analyses ignore the dramatic long-term declines in both weather-related mortality and the relative economic impact of extreme weather events. Disclosure activists also overestimate the costs of climate change by depreciating mankind’s remarkable capacity for adaptation.
Because they exaggerate the certainty and magnitude of climate change risk, disclosure advocates also overestimate the prospects for dramatic policy change.
The SEC proposal is a case in point. To explain investors’ “need for information about climate-related risks,” the SEC cites an October 2021 Treasury Department report on climate-related financial risk. The report came out just as Sen. Joe Manchin (D-WV) was pulling the plug on the Clean Electricity Performance Program, which was to be the centerpiece of President Biden’s Build Back Better climate legislation. From the executive summary:
The United States has made a commitment to lowering U.S. greenhouse gas (GHG) emissions by 50-52 percent from 2005 levels by 2030 and set a goal of a net-zero emissions economy by 2050. While overall U.S. GHG emissions have been trending downwards since 2005, meeting these targets will require significant changes across the economy. Sectors of the economy that are GHG-intensive, which include the energy, transportation, manufacturing, and agricultural sectors, likely need to undergo significant structural changes. These changes will likely require technological innovations and complementary policy actions that incentivize transitions to low-GHG methods of production. These could include regulation of GHG emissions, tax policies, or other measures that would incentivize or require reductions in GHG emissions. The necessary structural changes are likely to broadly affect households, communities, and businesses.
Treasury writes as if President Biden’s nationally determined contribution (NDC)—his emission-reduction pledge under the Paris Agreement—were an actual “commitment” of the “United States.” It is not. The NDC lays out the administration’s climate policy agenda. An NDC is non-binding under international law and has no force or effect under U.S. law until such time as Congress authorizes and funds it.
If reducing U.S. emissions 50-52 percent in just nine years were the goal of a constitutionally ratified treaty or of a duly enacted cap-and-trade program, then such targets would “require significant change across the economy,” entail sector-restructuring taxes and regulations, and “broadly affect households, communities, and businesses.” But Congress is no closer today to enacting a carbon tax, a national cap-and-trade program, or a national “clean electricity standard” than it was in 2012.
If anything, the odds today are slimmer than when Biden took office. High energy prices are a feature, not a bug, of progressives’ war on fossil fuels. But rising energy prices are now a massive political liability for Democrats heading into the midterm elections. Nor do Democrats want to look pro-Putin, but domestic policies designed to weaken America’s gas and oil industry enhance the Russian dictator’s energy leverage over Europe. If Democrats lose control of the House or Senate in November, Biden’s NetZero agenda will have even less chance of becoming U.S. policy.
The SEC proposal has always been more about manufacturing than reporting climate-policy risks. In February 2021, Biden administration officials apparently believed they could initiate a self-fulfilling prophecy. Enhanced climate scrutiny by the SEC, Treasury, and the Federal Reserve would accelerate capital flows out of the fossil fuel industry, build momentum for NetZero legislation, and launch the vaunted “clean energy transition.”
That has not happened. Instead, the administration’s hostility to fossil fuels lowered forecasts of future U.S. energy supplies, which increased current fuel prices, which then boosted fossil-fuel company profits and stock values.
The most pressing risks facing U.S. companies in the foreseeable future are unlikely to be those arising from climate change or an energy transition. Rather, the factors to watch are more apt to be inflation, rising energy costs, and national security threats that the Biden administration is too focused on climate change to anticipate or deter.