Comment Letter to the Securities and Exchange Commission: Proposed Rule on the Enhancement and Standardization of Climate-Related Disclosures for Investors

Summary

• Firm-specific greenhouse gas emissions, even if defined broadly, are not material information for investors because such firm-specific emissions would yield climate impacts effectively equal to zero. Accordingly, firm-specific emissions cannot affect the prospective returns to investment in that firm. Only under an assumption of government policies penalizing GHG emissions can such information be material, and such policies for the most part have not proven politically viable.
• The estimation of climate “risks” by public companies would be futile, politicized, distorted by an imperative to avoid regulatory and litigation threats, and largely arbitrary. Global GHG emissions can be material, but the model-driven estimation of global risks has proven difficult in the extreme, subject to profound disagreement in the peer-reviewed literature. That reality is demonstrated by the fact that the mainstream climate models have overestimated the actual temperature record by a factor of over two.
• The obvious effect of the proposed rule would be creation of powerful incentives for public companies to undertake climate analysis driven not by the actual evidence and the peer-reviewed literature on climate phenomena. Instead, they will be driven to undertake such analysis, whether in response to regulatory directives or to political pressures, under assumptions and methodologies insulating them from adverse regulatory actions and litigation threats. This incentive structure would yield politicized analysis biased heavily toward published estimation of climate “risks” greater rather than smaller on the part of public companies, with no material benefits for investors. This would provide regulators and other public officials a rationale for constraining capital access for disfavored firms and sectors, resulting in a misallocation of capital and a reduction in aggregate economic performance, with no measurable climate benefits. The proposed rule cannot satisfy any plausible benefit/cost test, and should be discarded.
• The SEC recognizes the litigation threat explicitly but fails to note that the litigation problem is created by virtually any “risk” analysis. Should, say, a severe storm follow a company’s conclusion that climate risks are unimportant in its specific context, the plaintiff attorneys will not be far behind, even though attribution of a given weather event to GHG emissions generally, and a fortiori to emissions attributable to a given firm, is deeply problematic. Should a firm calculate its GHG emissions as high relative to other companies or sectors, it will expose itself to purported causes of action as a “cause” of the asserted costs of the anthropogenic climate change “crisis.” This proposed rule guarantees adverse litigation for public companies under almost any set of assumptions, a cost not estimated by the SEC.
• No public company and few, if any, government administrative agencies are in a position to evaluate climate phenomena, whether ongoing or prospective, with respect to which the scientific uncertainties are vastly greater than commonly asserted. The range of alternative assumptions about central parameters is too great to yield clear implications for the climate “risks” facing specific public companies, economic sectors, and geographic regions. Those central parameters include the choices among climate models, the assumed sensitivity of the climate system to increases in the atmospheric concentration of greenhouse gases (GHG), ensuing conclusions about the relative contributions of natural and anthropogenic influences upon climate phenomena, the assumed future increase in atmospheric GHG concentrations through, say, 2100, and the analytic assumptions underlying calculations of the effects of aerosol emissions on cloud formation, about which surprisingly little is known. That short list is far from exhaustive.
• The SEC attempts to circumvent this obvious reality by asserting that “… that the science of climate modelling has progressed in recent years and enabled the development of various software tools and … climate consulting firms are available to assist registrants in making this determination.” Apart from the SEC recognition that the proposed rule will create (or expand) an industry of consultants, the assertion that “the science of climate modelling has progressed in recent years and enabled the development of various software tools” is deeply disingenuous. The mainstream climate models have a poor track record in terms of predicting the actual temperature trend of recent decades, having consistently overstated that trend by a factor of over two.
• Application of the Environmental Protection Agency climate model suggests strongly that climate policies, whether implemented by the U.S. government alone or as an international cooperative policy, would have temperature effects by 2100 that would be virtually undetectable or very small. Such policies cannot satisfy any plausible benefit/cost test.
• That observation is strengthened by the analysis presented in the proposed rule. The SEC estimate of the attendant change in external costs per fiscal year is an increase from $3.86 billion to $10.24 billion, an increase of 165 percent. “Internal” burden hours are projected to rise from 18.8 million hours to 43.5 million hours, or about 131 percent. These costs are almost certainly biased downward, in that the proposed rule would create powerful incentives to retain consultants and other outside experts to conduct the requisite measurements, again as the proposed rule recognizes explicitly.
• If public companies are driven to use the same (or similar) sets of assumptions about central parameters, a very real danger would arise of more-or-less homogeneous predictions inconsistent with historical, ongoing, and prospective climate phenomena. If public companies opt to use sets of assumptions that differ in important dimensions, the ensuing predictions about future climate phenomena (“risks”) would vary substantially, yielding very large uncertainties in terms of the information made available to investors. But — again — firm-specific greenhouse gas emissions, even if defined broadly, are not material information for investors because such firm-specific emissions would yield climate impacts effectively equal to zero.
• It is reasonable to hypothesize also that the aggregate benefits (that is, positive “risks”) of increasing GHG concentrations, as reported by the National Oceanic and Atmospheric Administration and in the peer-reviewed literature, will be excluded from such analytic efforts. It is reasonable to hypothesize further that such analyses will exclude the risks of climate policies, prominent among which are the large and adverse implications of artificial increases in energy costs. Such policy risks are likely to be greater when implemented by bureaucracies insulated from democratic accountability.
• Anthropogenic climate change is “real” in that increasing atmospheric concentrations of GHG have yielded effects that are detectable. But they are much smaller than commonly asserted; and there is no evidence in support of the ubiquitous assertions of a climate “crisis,” whether ongoing or looming, and no evidence in support of the even more extreme “existential threat” argument. Moreover, the available analysis suggests that the financial risks of anthropogenic climate change in the aggregate are much smaller than many assert: Both the central integrated assessment model and the IPCC in its most alarmist analyses calculate that anthropogenic climate change unmitigated by policy initiatives would reduce global per capita incomes by less than 1.5 percent by the end of this century, a figure almost certainly not statistically significant, and in any event at a time when the world is certain to be vastly wealthier than currently.
• Because the perceived “climate “risks” confronting public companies are dependent upon crucial choices among alternative assumptions, the evaluation of such “risks” would be largely arbitrary given that the “correct” assumptions are very far from obvious. This means that a requirement, whether formal or informal, that climate “risks” be reported to investors would weaken the materiality standard for disclosures by those institutions, even apart from the larger non-materiality reality noted above.
• “Materiality” always has meant the disclosure of information directly relevant to the ongoing or prospective financial performance of the given public company. When “risk” analysis becomes an arbitrary function of choices among assumptions complex, opaque, and far from obvious, the traditional materiality standard inexorably will be diluted and rendered far less useful for the investment and capital markets, an outcome diametrically at odds with the ostensible objectives of those advocating the evaluation of climate “risks.” Moreover, the “risks” of anthropogenic climate change are far from the only such mass-geography “risks.” A bias toward focusing only on climate “risks” would distort the allocation of capital.
• For all of these reasons, the analysis of the materiality issue published recently by Commissioner Allison Herren Lee is deeply problematic. Her argument simply shunts aside the massive analytic problems inherent in the analysis of climate “risks,” instead emphasizing a general stance that in the pursuit of capital investments, companies driven by market forces will not disclose even material risks fully as a matter of competitive market outcomes in the absence of regulatory mandates. Commissioner Lee ignores the powerful long-term incentives of public companies — always interested in reducing the cost of obtaining capital from investors and lenders — to preserve their credibility by offering full and truthful information to the capital market. It is perhaps unsurprising that a regulator views market incentives as insufficient to engender an efficient outcome in terms of resource allocation, and that a regulatory strengthening of such incentives automatically would yield an allocational improvement. That stance is very far from obviously correct.
• The combination of very great climate uncertainties and the litigation threat will create a demand from the business sector for detailed regulations on how to structure the analysis of climate risks. Because the uncertainties attendant upon the future effects of increasing atmospheric concentrations of GHG are so great, a top-down regulatory approach for the evaluation of any attendant “risks” is itself very risky. A wiser approach would entail allowing market forces to make such “risk” determinations in a bottom-up fashion, thus avoiding an obvious politicization of the allocation of capital.
• The proposed rule would distort the allocation of capital away from economic sectors disfavored by certain political interest groups pursuing ideological agendas. This would represent the return of Operation Choke Point, an illegal past attempt to politicize access to capital, one deeply corrosive of our legal and constitutional institutions.
• Protection of those institutions is consistent only with formal policymaking by the Congress through enactment of legislation, rather than with powerful pressures, whether formal or informal, exerted by the SEC or other regulatory agencies. This institutional protection would preserve the traditional roles of the private sector and of the government, respectively, as part of the larger permanent objectives of maximizing the productivity of resource use under free market competition, and of preserving the political accountability of the policymaking process under the institutions of democratic decisionmaking as constrained by the constitution.

Read the full statement here.