Disclosures relating to climate change, board and workforce diversity, and corporate political contributions, among other things, stray far from the existing securities regulation framework of providing information relevant to price discovery. This expansion is problematic. If the SEC’s disclosure regime becomes untethered from its price-discovery function, it can be bent to any purpose. Americans should feel secure that any disclosures the government requires are carefully cabined to encompass only information directly related to the legislation’s initial intent. These disclosures also often have unintended consequences, particularly where the purpose of the disclosure is to drive non-securities-related policy change.
The banking sector similarly suffers when inappropriate policy aims drive the regulation of banks. Precedent already exists for federal officials using bank regulations to allocate credit to further political goals, including to discourage payday lending and to hinder financing for gun dealers. It is entirely plausible that federal officials could soon repeat such actions, disfavoring those firms in industries that disturb certain political sensibilities (such as fossil fuels and nonorganic agriculture) by limiting access to banking services and payment systems.
Many federal agencies can influence bank activities through the federal regulatory framework, potentially imposing climate change–related regulations through the examination process (among other ways), whether citing concerns over capital adequacy, reputational risks, or even systemic risks. Regulators have a great deal of discretion in these cases, and banks have very little recourse. For example, the Federal Deposit Insurance Corporation can terminate a bank’s status as an insured depository institution if it finds that the bank has engaged in “unsafe or unsound practices,” and the agency alone is responsible for determining what constitutes unsafe or unsound practices. Moreover, when regulators determine that an insured depository institution has engaged in an unsafe or unsound practice, they have the explicit legal authority “to place limitations on the activities or functions of an insured depository institution or any institution-affiliated party.”3 Overall, bank regulators have enormous flexibility to develop regulations for anything that they deem a risk factor, including climate change, and banks will be very hesitant to push back against these requirements.