John H. Cochrane writes at Project Syndicate The Fallacy of Climate Financial Risk.  Excerpts in italics with my bolds.

The idea that climate change poses a threat to the financial system is absurd, not least because everyone already knows that global warming is happening and that fossil fuels are being phased out.
The new push for climate-related financial regulation is not really about risk; it is about a political agenda.

In the United States, the Federal Reserve, the Securities and Exchange Commission, and the Department of the Treasury are gearing up to incorporate climate policy into US financial regulation, following even more audacious steps in Europe. The justification is that “climate risk” poses a danger to the financial system. But that statement is absurd. Financial regulation is being used to smuggle in climate policies that otherwise would be rejected as unpopular or ineffective.

“Climate” means the probability distribution of the weather – the range of potential weather conditions and events, together with their associated probabilities. “Risk” means the unexpected, not changes that everyone knows are underway. And “systemic financial risk” means the possibility that the entire financial system will melt down, as nearly happened in 2008. It does not mean that someone somewhere might lose money because some asset price falls, though central bankers are swiftly enlarging their purview in that direction.

In plain language, then, a “climate risk to the financial system” means a sudden, unexpected, large, and widespread change in the probability distribution of the weather, sufficient to cause losses that blow through equity and long-term debt cushions, provoking a system-wide run on short-term debt. This means the five- or at most ten-year horizon over which regulators can begin to assess the risks on financial institutions’ balance sheets. Loans for 2100 have not been made yet.

Such an event lies outside any climate science. Hurricanes, heat waves, droughts, and fires have never come close to causing systemic financial crises, and there is no scientifically validated possibility that their frequency and severity will change so drastically to alter this fact in the next ten years. Our modern, diversified, industrialized, service-oriented economy is not that affected by weather – even by headline-making events. Businesses and people are still moving from the cold Rust Belt to hot and hurricane-prone Texas and Florida.

If regulators are worried even-handedly about out-of-the-box risks that endanger the financial system, the list should include wars, pandemics, cyberattacks, sovereign-debt crises, political meltdowns, and even asteroid strikes. All but the latter are more likely than climate risk. And if we are worried about flood and fire costs, perhaps we should stop subsidizing building and rebuilding in flood and fire-prone areas.

Climate regulatory risk is slightly more plausible. Environmental regulators could turn out to be so incompetent that they damage the economy to the point of creating a systemic run. But that scenario seems far-fetched even to me. Again though, if the question is regulatory risk, then even-handed regulators should demand a wider recognition of all political and regulatory risks. Between the Biden administration’s novel interpretations of antitrust law, the previous administration’s trade policies, and the pervasive political desire to “break up big tech,” there is no shortage of regulatory danger.

To be sure, it is not impossible that some terrible climate-related event in the next ten years can provoke a systemic run, though nothing in current science or economics describes such an event. But if that is the fear, the only logical way to protect the financial system is by dramatically raising the amount of equity capital, which protects the financial system against any kind of risk.

Risk measurement and technocratic regulation of climate investments, by definition, cannot protect against unknown unknowns or un-modeled “tipping points.”

What about “transition risks” and “stranded assets?” Won’t oil and coal companies lose value in the shift to low-carbon energy? Indeed they will. But everyone already knows that. Oil and gas companies will lose more value only if the transition comes faster than expected. And legacy fossil-fuel assets are not funded by short-term debt, as mortgages were in 2008, so losses by their stockholders and bondholders do not imperil the financial system.

“Financial stability” does not mean that no investor ever loses money.

Moreover, fossil fuels have always been risky. Oil prices turned negative last year, with no broader financial consequences. Coal and its stockholders have already been hammered by climate regulation, with not a hint of financial crisis.

More broadly, in the history of technological transitions, financial problems have never come from declining industries. The stock-market crash of 2000 was not caused by losses in the typewriter, film, telegraph, and slide-rule industries. It was the slightly-ahead-of-their-time tech companies that went bust. Similarly, the stock-market crash of 1929 was not caused by plummeting demand for horse-drawn carriages. It was the new radio, movie, automobile, and electric appliance industries that collapsed.

If one is worried about the financial risks associated with the energy transition, new astronomically-valued darlings such as Tesla are the danger. The biggest financial danger is a green bubble, fueled as previous booms by government subsidies and central-bank encouragement. Today’s high-fliers are vulnerable to changing political whims and new and better technologies. If regulatory credits dry up or if hydrogen fuel cells displace batteries, Tesla is in trouble. Yet our regulators wish only to encourage investors to pile on.

Climate financial regulation is an answer in search of a question. The point is to impose a specific set of policies that cannot pass via regular democratic lawmaking or regular environmental rulemaking, which requires at least a pretense of cost-benefit analysis.

These policies include defunding fossil fuels before replacements are in place, and subsidizing battery-powered electric cars, trains, windmills, and photovoltaics – but not nuclear, carbon capture, hydrogen, natural gas, geoengineering, or other promising technologies. But, because financial regulators are not allowed to decide where investment should go and what should be starved of funds, “climate risk to the financial system” is dreamed up and repeated until people believe it, in order to shoehorn these climate policies into financial regulators’ limited legal mandates.

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it – just as a decade’s worth of stress testers never considered the possibility of a pandemic.

John H. Cochrane is a senior fellow at the Hoover Institution.

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.

At a Hearing April 27, 2021: “Legislative Hearing on S.283, National Climate Bank Act”, Benjamin Zycher provided testimony Summarized at AEI: Statement submitted for the record: Subcommittee on Clean Air, Climate, and Nuclear Safety, Committee on Environment and Public Works.

Summary

This Statement Submitted for the Record offers a critical review of legislation proposed in the 117th Congress, 1st Session, as S. 283, The National Climate Bank Act (hereafter NCBA), the subject of a hearing scheduled for April 27, 2021 before the Subcommittee on Clean Air, Climate, and Nuclear Safety of the Committee on Environment and Public Works. A summary of the arguments presented below is as follows:

• A National Climate Bank cannot increase the capital resources available to the U.S. economy or to the federal government, and the true economic cost of the outlays envisioned to be made by the National Climate Bank would be almost double the notional budget.
• The “climate” projects envisioned for the National Climate Bank would be highly inefficient regardless of the assumptions made about climate phenomena and the current and prospective effects of greenhouse gas emissions. This is because the envisioned projects would yield future climate impacts either trivial or undetectable. This explains the failure of the proposed legislation to specify a requirement or to offer a projection of reductions in GHG emissions attendant upon the projects to be funded by the National Climate Bank.
• The “Findings” in the proposed legislation on current climate phenomena are not supported by the evidence.
• The “Findings” in the proposed legislation on future climate phenomena are based upon Representative Concentration Pathway 8.5, an extreme scenario of future atmospheric concentrations of greenhouse gases virtually impossible.
• Because the proponents of the National Climate Bank have based their analytic arguments in substantial part upon the findings and policy proposals presented by the Intergovernmental Panel on Climate Change in its Special Report “Global Warming of 1.5°C,” they implicitly are endorsing a gasoline tax of $28 per gallon by 2030.
• The obvious underlying purpose of the National Climate Bank is a shift of political responsibility for the inevitable financial losses to be incurred from the Congressional proponents of the legislation to the administrators of the National Climate Bank. Such a shift is inconsistent with the basic constitutional structure of American governance, and thus with essential accountability inherent in our political institutions.
• The actual results of a National Climate Bank would be substantial resource waste, a less-productive capital stock, lower wages, and an increase in the politicization of economic activity.

Read  the full report  Zycher Statement Senate EPW climate bank

Andrew Stuttaford explains how the Biden regime encourages capitalists to spend investors’ wealth on projects favored by progressives for virtue rather than profit. His National Review article is Rule by Regulation. Excerpts in italics with my bolds.

The fondness of the Biden administration for rule by regulation is hardly a secret by now, and, when it comes to telling corporations that they should run themselves according to the precepts of stakeholder capitalism, the regulatory route comes with an added advantage.

To be sure, many companies, particularly larger ones, are already falling into line without any pressure from the state, because it suits the interests of managers (shareholders can be such a demanding bunch) and/or because they have been pushed to do so by a handful of large investment managers who can see the opportunity that “socially responsible” investing (SRI), an investment philosophy intertwined with stakeholder capitalism, represents for them, if not for their clients.

Other managements, however, would prefer to continue to run their businesses for the benefit of the shareholders (a stance, incidentally, that is rather more sophisticated than the usual Gekko caricature). Forcing such businesspeople to change their ways through legislation might be tricky, even in the current political environment. While SRI will continue to spread through the private sector, many in Washington, D.C., would like this “progress” to move forward at a faster clip. If that is to happen, regulation will have to play a central role. Key regulators seem only too happy to oblige. The last few months have seen a “greening” of the Fed that shows little sign of slowing down.

From the Financial Times last month:

After years of silence on the topic, the Fed has started to put climate issues centre stage. Shortly after Biden won the election, the central bank highlighted climate change as a threat to financial stability and moved to join the Network for Greening the Financial System, a consortium of central banks dedicated to supporting the goals of the Paris climate accord.

Now with Trump out of office and the Biden administration pushing hard to make up lost ground in the climate fight, Fed officials are speaking out more explicitly about climate risk and how they intend to take action.

“Financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both,” said Federal Reserve governor Lael Brainard, at the Institute of International Finance’s inaugural climate finance summit yesterday.

Brainard is wrong, but in two different ways. The idea that climate change represents a material risk to the financial system at any time in the reasonably near future is laughable. I will turn, as I so often do, to the talk given by economist John Cochrane to a conference organized by the European Central Bank (ECB) last fall:

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.) [More on Cochrane’s thinking in linked post at end.]

The real aim of the emerging central-bank game is two-fold. Firstly, to increase the cost of capital for climate sinners by “discouraging” banks from lending to them and secondly, by mandating disclosure of such risks (and you can be sure that claims that they are minimal will not be acceptable) as a means to give climate warriors information that they can then use as a cudgel against financial institutions lending to the wrong sort of clients.

Such a disclosure regime would be designed to help activists, not shareholders. It would have nothing to do with “risk.”

The biggest risk to those climate sinners (specifically the fossil-fuel companies) may well come from the steps that regulators may take against them, a fact with more than a hint of a circular argument about it.

To the extent that they apply to all companies, the underlying aim will be to use disclosure not for the purposes of investor protection, but, one way or another, to ensure that every public company is browbeaten into ideological conformity.

Beyond that, it is easy to see that mandated disclosure of what companies are doing might well become, in time, the basis for setting standards for what they should be doing. And the more that the ability to impose that requirement is within the power of regulators alone (as opposed to having to involve legislators), the greater the likelihood that this will take place.

Then there’s Brainard’s reference to the risk posed by a “disorderly” transition to a low-carbon economy, whatever she means by that. If there is to be a transition to a low-carbon economy it would best be achieved in (so to speak) a “disorderly” fashion, without the command-and-control measures that much of the establishment now appear to favor, measures that are almost guaranteed to prove immensely destructive. Those who think otherwise should take a look at California or Germany’s disastrous Energiewende. The contribution of government should consist of some support for basic research, the odd legislative nudge, and the big bucks should go toward infrastructure programs to toughen our resilience to “weather,” whatever the climate may do: sea defenses for low-lying cities, winterizing the Texas grid, and so on. Much of the spending in that last category would likely pay for itself within a relatively short time.

All in all, this does not look like good news for those shareholders who prefer to focus on profitability, return on capital and other such ancient metrics.

And it won’t be too great for the economy either.

Resources:  John Cochrane’s Central Banking Presentation at post Bankers Should Mind Their Own Business, not the Climate

See also:  Financiers Failed Us: Focused on Fake Crisis