Today the SEC voted 3-2 to approve an interpretive release offering guidance to companies on disclosure obligations as they relate to climate change. Commissioners Casey and Paredes voted to reject the proposed guidance.
Everyone can agree that companies may have an obligation under Regulation S-K to disclose risks arising from, among other many things, climate change laws and regulations. But this guidance goes further, urging companies to disclose risks arising from “physical effects of climate change.” This is nonsense on stilts. Leave aside the underlying inanity of the larger enterprise built on the premise that rationally-ignorant and rationally-passive individual investors should read, assess and make active investment decisions on the basis of massive amounts of regularly-disclosed information. Here corporations are asked to disclose “information” about risks to the company posed by future, possible environmental conditions about which the firms know nothing, the science is utterly un-settled and speculative, and the actual physical and economic consequences of which are even less certain. (I put the word information in scare quotes because nothing so speculative and uncertain can reasonably be called information). What possible value could there be to investors (assuming there is any value to investors from disclosure of this type of information anyway) from the sorts of disclosures that would reasonably follow?: “There is somewhere between a 0% and 90% chance that the temperature during either the summer or the winter or maybe-but-not-definitely both will be either warmer or colder by somewhere between 0.01 and 5 degrees sometime within the next 300 years. This may or may not be bad for our business depending on whether it makes our customers richer or poorer, improves or harms our productivity and helps or harms our competitors by more or less than it helps or harms us.”
At least Troy Paredes isn’t buying it and once again stands nearly alone (Commissioner Casey also voted to reject) for common sense in Washington. An extended quote from his statement at today’s hearing:
Second, the release states that companies “whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from,” the “physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality.”
The prospect that this guidance will in fact foster confusion and uncertainty about a company’s required disclosures troubles me. What triggers a “reputational damage” or “physical effects” disclosure is far from certain, as is the scope of any such disclosure if and when required. More to the point, reputational damage and the impact on a company of the physical effects of climate change can be quite speculative. There is a notable risk that the interpretive release will encourage disclosures that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information. Here, it is worth recalling that, in rejecting the view that a fact is “material” if an investor “might” find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that “management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.
Also problematic are the interpretive release’s introductory and background discussions on climate change and its regulation. To me, the effect of the discussions is to find the Commission joining the ongoing debate over climate change by lending support to a particular view of climate change. Although the release does not expressly take sides, the release emphasizes the “concerns” and potential harms of climate change and discusses a range of regulatory and legislative developments, along with international efforts, aimed at regulating and otherwise remedying causes of climate change. In particular, the release highlights new EPA regulations, proposed “cap-and-trade” legislation, the Kyoto Protocol (which the U.S. has not ratified), the European Union Emissions Trading System, and recent discussions at the United Nations Climate Conference in Copenhagen. While the release stresses the risks of climate change and ongoing efforts to regulate greenhouse gas emissions in the U.S. and abroad, the release fails to recognize that the climate change debate remains unsettled and that many have questioned the appropriateness of the regulatory, legislative, and other initiatives aimed at reducing emissions that the release features. In short, I am troubled that the release does not strike a more neutral and balanced tone when it comes to climate change — an area far outside this agency’s expertise.
Finally, given that there are more pressing priorities before the Commission, now is not the time for this agency to consider climate change disclosure.
For these reasons, I am not able to support the release before us. Nonetheless, I would like to thank the staff for their efforts and professionalism.
On the bright side, maybe this means the SEC is qualified to investigate the fraudulent disclosures in the UN IPCC’s Fourth Assessment Report. On the other hand, the existence of such . . . misstatements in the authoritative global survey of climate change science suggests that, as Troy suggests, this whole endeavor will have few of the intended–and plenty of unintended–consequences.