Today, let’s consider the views, or at least the real interests, of environmental activists in evaluating the Securities and Exchange Commission’s (SEC) recent climate risk rule proposal. In my view, the environmental movement stands to lose from symbolic “meme regulation”—to coin a term—like this rulemaking.
Did anyone ask environmentalists?
Well, plainly yes, in a sense. The SEC’s comment letter file is already filling with submissions from NGOs and “stakeholders” who are relatively infrequent participants in, say, nuts‐and‐bolts discussions of securities market infrastructure. In another sense, however, plainly no—the proposed rulemaking is motivated by a desire to do something, even if that something has little practical prospect of addressing underlying concerns.
Let me be plain. The stated rationale for the proposed rule is entirely pretextual. There is a vanishingly small likelihood that the SEC leadership earnestly believes that—but for the present rulemaking—a securities fraud of staggering historical magnitude would be perpetrated against the investing public. “Enhancement” of the existing disclosure regime seems difficult to sustain on grounds that there is material information about the impending inundation of planet earth that is, at this late date, unbeknownst to investors. As a junior associate with a U.S. law firm in Tokyo a decade ago, I regularly was tasked with drafting risk factors observing that the eruption of Mount Fuji “could have a material adverse effect on our business, financial condition, and results of operations.” Similarly penetrating exercises in the obvious by private securities lawyers will abound if the proposed rule is adopted.
There is also little probability that discrepancies in the manner in which two issuers disclose (or do not disclose) the extent of their Scope 1 and 2 emissions will jeopardize anyone’s retirement nest egg, nor any argument for why the “reasonable investor” would base an investment decision on such a discrepancy. The best argument for “standardization” normally arises in cases like the various industry guides that the SEC already puts forth to ensure that plainly material operational matters—like oil and gas reserves of energy issuers—are stated in an apples‐to‐apples manner.
What, then, is the true rationale for the rulemaking? Surely not mitigating the projected consequences of global warming, any more than the proponents of the conflict minerals rule believed that enforcement lawyers in the SEC’s New York Regional Office would strike a blow against the enslavement of child miners by Congolese warlords, or that the perfectly inane pay ratio rule would reduce the U.S. Gini coefficient. I should not be uncharitable here, and I will recite in print all the requisite dainty acknowledgments: conflict minerals are bad; inequality is sometimes bad; global warming would be bad if it happens too swiftly and without appropriate preparations by mankind. (Disclosure: I formerly served as counsel to Acting Chairman & Commissioner Michael S. Piwowar, who in 2017 lambasted the Congo conflict minerals rule for provoking a “tide of unintended consequences washing over the Democratic Republic of the Congo and surrounding areas.” The statistical absurdity of disclosing the ratio of a CEO’s salary to the median employee—as mandated by the pay ratio rule—requires no further elaboration.)
If you agree that these things are bad—perhaps even more so than this phlegmatic author—are you satisfied with the relegation of substantial matters of U.S. foreign, environmental, economic, and (presumably soon) social policy to a securities regulator? Should real‐world problems be fobbed off on the SEC merely on grounds that “disclosure is easier than actually doing something real”?
In case you missed it, click here for part 1, part 2, and part 3 of the impromptu questions.
