A Toxic Belch of Swamp Gas from the Regulatory Marsh

Ron Knecht

Another belch of environmental swamp gas is rising from the depths of the federal regulatory marsh. Of course, it looks and sounds so innocent, benign and even beneficial – something Nevada investors, businesses, public investment funds, investment fund managers and citizens should welcome, not fear. But it is toxic to all of them and thus to our economy and the public interest.

This one comes not from the usual environmental agencies, but instead from the Securities and Exchange Commission, which regulates investment by investors in businesses and the advice investment professionals provide to investors. It shows the real meaning of President Joe Biden’s orders for the “whole of government” to go all in on his policy initiatives, especially his global warming hobby horse.

The proposal, unveiled in March 2022 and nearing possible adoption this year, comes in three parts, each more ominous than the last. It would require public companies, in their securities registration statements and periodic reports, to disclose information on climate-related risks its management and board think they face, plus how those matters have affected or are likely to affect its strategy, business models and outlook.

Section 1 would require companies to disclose greenhouse gas emissions they generate directly in their production and other business activities, information they likely can provide but which may disclose trade secrets or other competitive advantages if published.

Section 2 would require them to identify the emissions generated by other firms from whom they purchase goods or services, information they normally don’t have, which their suppliers may be loathe to provide and which the reporting firms may be unable to verify.

Last and most burdensome, perhaps impossible, section 3 would require them to disclose indirect emissions generated by their supply chains, if material; smaller companies would be exempt from this provision. Some proponents have even suggested the section 3 proposals are generally insufficient by themselves to allow adequate evaluation of firms’ climate risks.

So, the environmental and other special interests fervently seek to include and perhaps extend these provisions. They also say section 3 disclosures must be included, lest companies outsource some of their section 1 activities to avoid disclosing them.

Due to burden, uncertainty about matters to be reported, liabilities to law suits such disclosure may generate, and possible disclosure of competitive information, the proposal has generated extensive business and investment opposition.

Unsurprisingly, it gets enthusiastic support by environmental special interests: lawyers, academics, consultants and expert witnesses, and bureaucrats. It is a full-employment act for them and supported by Congressional Democrats.

Some parties even claim the proposal has backing from institutional investors and asset managers, but that must be qualified.

In general, the investment boards are not as sophisticated as large private investors, and are more driven by politics, such as demonstrating their green bona fides to their appointing authorities, than to investment prudence and results. Some advisory firms, such as Institutional Shareholder Services, in fact specialize in steering public and other investment boards toward environmental, social and governance (ESG) norms, including green energy or diversity, inclusion and equity (DEI) and critical theory.

Some asset managers, such as Black Rock, have also created special funds with these goals and are thus looking to sell such advice to gullible fiduciaries; such requirements would boost their revenues.

Although the Sierra Club and others claim investors and other market participants rely on some such information for a few industries, the evidence is sketchy at best for even them. Hence, extending and standardizing such requirements is not justifiable, except to provide basis for forcing further and unjustified regulation of the economy.

Congressional Republican leaders have told the SEC the proposal exceeds the SEC’s mission, expertise and authority and will unnecessarily harm consumers, workers and our economy. SEC regulation has long been lauded for being reasonably restrained, requiring appropriate disclosure, not regulatory diktat.

Nevadans should know this unfair proposal will demolish that line and be greatly dysfunctional.

(This column originally appeared in Nevada Business.)

Ron Knecht

Ron Knecht

Senior Policy Fellow

Ron Knecht, MS, JD & PE(CA), is a Senior Policy Fellow at the Nevada Policy Research Institute.  Previously, he served Nevadans as State Controller, a higher education Regent, Senior Economist, college teacher and Assemblyman.  Contact him at RonKnecht@aol.com.