Arguments for Climate Risk Disclosure
- The SEC believes investors should understand climate risks and therefore the SEC should mandate disclosure of that risk.
- Climate risk is an existential risk that firms face, and adverse selection can be mitigated by investors inferring that companies that do not disclose are bad companies.
- A regulator can help ensure companies do not lie by setting standards for disclosure and checking that companies are not lying.
Arguments against Climate Risk Disclosure
- There are other existential risks that firms face that do not have special disclosure requirements, such as pandemic risk or nuclear war risk.
- It is not clear what needs to be disclosed for climate risk, as climate models do not agree with each other and it is difficult to audit climate-related disclosures.
- Companies may not have a comparative advantage in assessing their climate risk exposure compared to investors.
- The reaction of companies and the economy to climate risk depends critically on regulation and lawmakers, and it is not clear why companies would have any better idea of how lawmakers would react than investors or lawmakers themselves.
- The SEC's proposed climate disclosure rules are not anchored in concepts of materiality and veer away from investor protection.
- The SEC lacks specific language in its Congressional authorization to support its authority to require climate exposure reporting.
Concerns about the SEC's Authority
- The SEC's proposed climate disclosure rule may face legal challenges due to the lack of explicit statutory authority.
- The SEC's statutory authority focuses on investor protection, not environmental regulation or climate policy.
- Congress has not granted the SEC explicit authority to compel disclosure about climate-related matters.
- Several lawsuits are expected to be filed by various organizations and individuals, challenging the SEC's authority and compliance with rulemaking regulations.
Impact of Larry Cunningham's Comment Letter
- The comment letter organized by Larry Cunningham received significant attention and influenced the debate on the SEC's proposal.
- Cunningham believes the SEC's existing rules already mandate disclosure of material climate risk and that the new proposal goes to the other extreme with excessive regulatory specificity.
Potential Beneficiaries of the Proposed Rule
- The primary beneficiaries of the proposed rule are climate activist groups and large index fund managers, while the interests of individual investors are not prioritized.
SEC's Role and the Trend of Achieving Social Objectives through Regulatory Agencies
- The SEC's job is to protect investors, not to change the operations of companies or facilitate non-investor interests.
- There is a trend of trying to achieve social objectives through institutions or regulatory agencies not designed for that purpose.
