SEC Warned Off Climate Disclosures

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David Burton writes to the Securities Exchange Commission explaining the hazards they will be taking on needlessly should they continue desiring to impose Climate Change Disclosures on publicly traded enterprises.  His document was sent to the SEC Chairman entitled Re: Comments on Climate Disclosure.  Excerpts in italics with my bolds.

Summary of Key Points

1. Climate Change Disclosure Would Impede the Commission’s Important Mission.

The important mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Mandatory climate change disclosure would impede rather than further that mission. It would affirmatively harm investors, impede capital formation and do nothing to improve the efficiency of capital markets.

2. Immaterial Climate Change “Disclosure” Would Obfuscate Rather than Inform.

The concept of materiality has been described as the cornerstone of the disclosure system established by the federal securities laws. Disclosure of material climate-related information is already required under ordinary securities law principles and Regulation SK. Mandatory “disclosure” of immaterial, highly uncertain, highly disputable information would obfuscate rather than inform. It will harm rather than hurt investors.

3. Climate Models and Climate Science are Highly Uncertain.

There is a massive amount of variance among various climate models and uncertainty regarding the future of the climate.

4. Economic Modeling of Climate Change Effects is Even More Uncertain.

There is an even higher degree of variance and uncertainty associated with attempts to model or project the economic impact of highly divergent and uncertain climate models. Any estimate of the economic impact of climate change would have to rely on highly uncertain and divergent climate model results discussed below. In addition to this high degree of uncertainty would be added an entirely new family of economic ambiguity and uncertainty. Any economic estimate of the impact of climate change would also have to choose a discount rate to arrive at the present discounted value of future costs and benefits of climate change and to estimate the future costs and benefits of various regulatory or private responses. The choice of discount rate is controversial and important. Estimates would need to be made of the cost of various aspects of climate change (sea level rises, the impact on agriculture, etc.). Estimates would need to be made of the cost of various remediation techniques. Guesses would need to be made about the rate of technological change. Guesses would need to be made about the regulatory, tax and other responses of a myriad of governments. Estimates would need to be made using conventional economic techniques regarding the economic impact of those changes which, in turn, would reflect a wide variety of techniques and in many cases a thin or non-existent empirical literature. Guesses would need to be made of market responses to all of these changes since market participants will not stand idly by and do nothing as markets and the regulatory environment change. Then, after making decisions regarding all of these extraordinarily complex, ambiguous and uncertain issues, issuers would then need to assess the likely impact of climate change on their specific business years into the future – a business that may by then bear little resemblance to the issuers’ existing business.

Then, the Commission would need to assess the veracity of the issuers’ “disclosure” based on this speculative house of cards. The idea that all of this can be done in a way that will meaningfully improve investors’ decision making is not credible.

5. The Commission Does Not Possess the Expertise to Competently Assess Climate Models or the Economic Impact of Climate Change.

The Commission has neither the expertise to assess climate models nor the expertise to assess economic models purporting to project the economic impact of divergent and uncertain climate projections.

6. The Commission Has Neither the Expertise nor the Administrative Ability to Assess the Veracity of Issuer Climate Change Disclosures.

The Commission does not have the expertise or administrative ability to assess the veracity, or lack thereof, of issuer “disclosures”  based on firm-specific speculation regarding the impact of climate change which would be based on firm-specific choices regarding highly divergent and uncertain economic models projecting the economic impact of climate changes based on firm-specific choices regarding highly divergent and uncertain climate models.

7. Commission Resources Are Better Spent Furthering Its Mission.

Imposing these requirements and developing the expertise to police such climate disclosure by thousands of issuers will involve the expenditure of very substantial resources. These resources would be much better spent furthering the Commission’s important mission.

8. The Costs Imposed on Issuers Would be Large.

Requiring all public companies to develop climate modeling expertise, the ability to make macroeconomic projections based on these models and then make firm-specific economic assessments based on these climate and economic models will be expensive, imposing costs that will amount to billions of dollars on issuers. These expenses would harm investors by reducing shareholder returns.

9.Climate Change Disclosure Requirements Would Further Reduce the Attractiveness of Becoming a Public Company,
Harming Ordinary Investors and Entrepreneurial Capital Formation.

Such requirements would further reduce the attractiveness of being a registered, public company. They would exacerbate the decline in the number of public companies and the trend of companies going public later in their life cycle. This, in turn, would deny to ordinary (unaccredited) investors the opportunity to invest in dynamic, high-growth, profitable companies until most of the money has already been made by affluent accredited investors. It would further impede entrepreneurial access to public capital markets.

10. Climate Change Disclosure Requirements Would Create a New Compliance Eco-System and a New Lobby to Retain the Requirements.

The imposition of such requirements would result in the creation of a new compliance eco-system and pro-complexity lobby composed of the economists, accountants, attorneys and compliance officers that live off of the revised Regulation S-K.

11. Climate Change Disclosure Requirements Would Result in Much Litigation.

The imposition of such requirements would result in much higher litigation risk and expense as private lawsuits are filed challenging the veracity of climate disclosures. These lawsuits are virtually assured since virtually no climate models have accurately predicated future climate and the economic and financial projections based on these climate models are even more uncertain. Litigation outcomes would be as uncertain as the underlying climate science, economics and the associated financial projections. This would harm investors and entrepreneurial capital formation.

12. Material Actions by Management in Furtherance of Social and Political Objectives that Reduce Returns must be Disclosed.

Many environmentally constructive corporate actions will occur in the absence of any government mandate or required disclosure. For example, energy conservation measures may reduce costs as well as emissions. No new laws or regulations are necessary to induce firms to take these actions. Assuming they are not utterly pointless, climate change disclosure laws presumably would be designed to induce management to take action that they would not otherwise take. To the extent management takes material actions in furtherance of social and political objectives (including ESG objectives) that reduce shareholder returns, whether induced by climate change disclosure requirements or taken for other reasons, they need to disclose that information. The Commission should ensure that they do so. Absent some drastic change in the underlying law by Congress, this principle would apply to any reduction in returns whether induced by ESG disclosures (climate change related or otherwise) or taken by management on its own initiative to achieve social and political objectives.

13. Fund Managers Attempts to Profit from SRI at the Expense of Investors Should be Policed.

Fund management firms are generally compensated from either sales commissions (often called loads) or investment management fees that are typically based on assets under management. Their compensation is not closely tied to performance. Thus, these firms will often see a financial advantage in selling “socially responsible” products that perform no better and often worse than conventional investments. It is doubtful that this is consistent with Regulation BI. Their newfound interest in socially responsible investing should be taken with the proverbial grain of salt. The Commission should monitor their efforts to profit from SRI at the expense of investors.

14. Duties of Fund Managers Should be Clarified.

The extreme concentration in the proxy advisory and fund management business is cause for concern. As few as 20 firms may exercise effective control over most public companies. The Commission should make it clear that investment advisers managing investment funds, including retirement funds or accounts, have a duty to manage those funds and to vote the shares held by the funds in the financial, economic or pecuniary interest of the millions of small investors that invest in, or are beneficiaries of, those funds and that the funds may not be managed to further the managers’ preferred political or social objectives.

15. Securities Laws are a Poor Mechanism to Address Externalities.

Externalities, such as pollution, should be addressed by either enhancing property rights or, in the case of unowned resources such as the air and waterways, by a regulatory response that carefully assesses the costs and benefits of the regulatory response. Securities disclosure is the wrong place to try to address externalities. Policing externalities is far outside of the scope of Commission’s mission and the purpose of the securities laws.

16. Climate Change Disclosure Requirements Would Have No Meaningful Impact on the Climate.

When all is said and done, climate change disclosure requirements will have somewhere between a trivial impact and no impact on climate change.

17. Efforts to Redefine Materiality or the Broader Purpose of Business should be Opposed.

Simply because some politically motivated investors seek to impose a disclosure requirement on issuers does not make such a requirement material. The effort to redefine materiality in the securities laws is part of an increasingly strident effort to redefine the purpose of businesses more generally to achieve various social or political objectives unrelated to earning a return, satisfying customers, or treating workers or suppliers fairly. This is being done under the banner of social justice; corporate social responsibility (CSR); stakeholder theory; environmental, social and governance (ESG) criteria; socially responsible investing (SRI); sustainability; diversity; business ethics; common-good capitalism; or corporate actual responsibility. The social costs of ESG and broader efforts to repurpose business firms will be considerable. Wages will decline or grow more slowly, firms will be less productive and less internationally competitive, investor returns will decline, innovation will slow, goods and services quality will decline and their prices will increase.

18.  ESG Requirements will Make Management Even Less Accountable.

In large, modern corporations there is a separation of ownership and control. There is a major agent/principal problem because management and the board of directors often, to varying degrees, pursue their own interest rather than the interests of shareholders. Profitability is, however, a fairly clear measure of the success or failure of management and the board. If a firm become unprofitable or lags considerably in profitability, the board may well replace management, shareholders may replace the board or another firm may attempt a takeover. Systematic implementation of regulatory ESG or CSR requirements will make management dramatically less accountable since such requirements will come at the expense of profitability and the metrics relating to success or failure of achieving ESG or CSR requirements will be largely unquantifiable. For that matter, ESG or CSR requirements themselves tend to be amorphous and ever changing.



  1. daveburton · July 6, 2021

    Just as a point of clarification: the author of that impressive analysis is one David R. Burton, who is not me. I am David A. Burton.

    “They’re everywhere! They’re everywhere!”


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