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The SEC’s Power Grab Attempt: A Powerful Dissent

By Richard W. Fulmer -- March 25, 2022

“I offer a modest counter proposal: Require all regulatory agencies to provide Scope 1, 2, and 3 disclosures for their day-to-day operations and for all proposed regulatory changes and to make those disclosures public.

On March 21 of this year, the Securities and Exchange Commission (SEC) issued a press release announcing:

proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.

Required information would include Scope 1, 2, and 3 emission disclosures, which (respectively) cover a company’s own greenhouse gas (GHG) emissions; emissions by the company’s energy provider(s); and emissions by the company’s suppliers, employees, and customers.

As SEC Chair Gary Gensler explains in one of his Office Hours video shorts, the goal is to allow investors to weigh claims of environmental responsibility made by companies and market funds.

SEC’s Peirce’s Free Market Rebuttal

In her response to the announcement, SEC Commissioner Hester M. Peirce offered objections to the proposal, citing its lack of:

  • A credible rationale for such a prescriptive framework when our existing disclosure requirements already capture material risks relating to climate change;
  • A materiality limitation;
  • A compelling explanation of how the proposal will generate comparable, consistent, and reliable disclosures;
  • An adequate statutory basis for the proposal;
  • A reasonable estimate of costs to companies; and
  • An honest reckoning with the consequences to investors, the economy, and this agency.  

The following are highlights of Pierce’s statement (emphasis added):

“The proposal turns the disclosure regime on its head.  Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes.…  The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies.  It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks.  It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.…”

“[The proposal] establishes a disclosure framework based, in large part, on the Task Force on Climate-Related Financial Disclosures (“TCFD”) Framework and the Greenhouse Gas Protocol.  It requires disclosure of: climate-related risks; climate-related effects on strategy, business model, and outlook; board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks; plans for transition; financial statement metrics related to climate; greenhouse gas (“GHG”) emissions; and climate targets and goals.”

“Under the proposal, a company, unless it is a smaller reporting company, would have to disclose Scope 3 emissions, but only if the company has set an emissions reduction target that includes Scope 3 emissions or if those emissions are material.  The materiality limitation is not especially helpful because the Commission suggests that such emissions generally are material,”

“The proposal does not just demand information about the company making the disclosures; it also directs companies to speculate about the habits of their suppliers, customers, and employees; changing climate policies, regulations, and legislation; technological innovations and adaptations; and changing weather patterns.”

“Another area where the proposal will mandate disclosure of information that appears useful but that likely will be entirely unreliable involves physical risks tied to climate change.  Establishing a causal link between physical phenomena occurring at a particular time and place and climate change is, at best, an exceedingly difficult task.  Disclosures on the physical risk side will require companies to select a climate model and adapt it to assess the effects of climate change on the specific physical locations of their operations, as well as on the locations of their suppliers and customers.  This undertaking is enormous. It will entail stacking speculation on assumptions.  It will require reliance on third-parties and an array of experts who will employ their own assumptions, speculations, and models.  How could the results of such an exercise be reliable, let alone comparable across companies or even consistent over time within the same company? “

“Required disclosures of so-called transition risks – [that is, negative impacts to the business from] ‘regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks…’ Transition risk can derive from potential changes in markets, technology, law, or the more nebulous “policy,” which companies will have to analyze across multiple jurisdictions and all across their “value chains.”  These transition assessments are rooted in prophecies of coming governmental and market action, but experience teaches us that such prophecies often do not come to fruition.  Markets and technology are inherently unpredictable.  Domestic legislative efforts in this context have failed for decades, and international agreements, like the Paris Accords, have seen the United States in and out and back in again.  How could this proposal thus elicit comparable, consistent, and reliable disclosure on these topics?”

“It is important to remember… that noble intentions, once baked into complex regulatory plans, often have ignoble results.  This risk is considerably heightened when the regulatory complexity is designed to push capital allocation toward politically and socially favored ends, and when the regulators designing the framework have no expertise in capital allocation, political and social insight, or the science used to justify these favored ends.  This proposal, developed under these circumstances, will hurt investors, the economy, and this agency. 

“Investors will not be the only ones to suffer from the diversion of attention from financial to climate objectives.  The whole economy, and all of the consumers and producers it sustains, could also be hurt.  First, the proposal is likely counterproductive to the important concerns around climate change.  Attempting to drive long-term capital flows to the right companies ex ante is a fool’s errand because we simply do not know what effective climate solutions will emerge or from where.  Markets, if we let them work, are remarkably deft at solving problems of all sorts, even big problems like climate change, but they do so in incremental and surprising ways that are driven by a combination of chance, opportunity, necessity, and human ingenuity. “

“[D]riving more capital toward green investments as defined uniformly by financial regulators could fuel an asset bubble that could make the financial system more vulnerable rather than more resilient.”


The following objections can be added to Commissioner Pierce’s:

  • According to the SEC’s announcement, the comment period will be limited to “30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.” That is a very short time for interested parties to evaluate the far-reaching impact of the requirements listed in the 534-page document.
  • Regulatory herding (e.g., “driving more capital toward green investments as defined uniformly by financial regulators”) can lead to regulatory stampedes (e.g., asset bubbles). A critical component of risk management is diversity. Requiring all a nation’s firms to define and deal with risk in a uniform manner could lead to catastrophe.
  • The SEC’s new requirements will themselves likely have a significant carbon footprint. Tens of thousands of workers with thousands of companies across the nation will expend scarce resources and energy to provide, review, and audit this information every year.
  • What is the opportunity cost of redirecting scarce resources to providing these reports and away from increasing the wealth that will better enable us to adapt to climate change?

I offer a modest counter proposal: Require all regulatory agencies to provide Scope 1, 2, and 3 disclosures for their day-to-day operations and for all proposed regulatory changes and to make those disclosures public.

One Comment for “The SEC’s Power Grab Attempt: A Powerful Dissent”


    I’d add that the SEC proposal assume there is no regulatory risk. What about the sunk costs incurred if the regulation of climate loses its political favor?


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