23 Feb 2023 Scott Shepard: If Carbon Emissions Are ‘Material Disclosures,’ So Is Everything Else
Recent reports suggest that Gary Gensler, the hard-left Chairman of the Securities & Exchange Commission (SEC), has realized that his proposed carbon-disclosure rule is so sweeping and costly as to guarantee that the courts will strike it down. He is now mulling revisions that would keep some smaller companies from having to report, and would reduce some of the most absurd reporting requirements such as “lost revenues and costs not incurred because of climate-related factors” (which would be so speculative as to be meaningless, but very costly to conjure).
It’s unlikely that these relatively minor changes will save Gensler’s carbon-disclosure rule as there are a host of sufficient grounds on which to challenge it. One is that it lies wholly beyond the SEC’s remit in both subject matter and approach. Another is that its focus is hopelessly politicized and non-objective, in that the required disclosures all presuppose a highly partisan and contested understanding of the relevant issues, such that allowing the rule to go into effect would permanently politicize the SEC. A third is that the costs involved are so great as to require express congressional authorization for the move under the evolving major-questions doctrine.
Perhaps the central reason why this rule cannot stand, however, one directly related to the administrative overreach embodied by the rule, is this: If the rule survives, it will be because the courts have found not only that carbon-emission disclosures constitute information directly “material” to smaller investors, but also that all information that is as tangentially related to a company’s stock performance as carbon emissions is also material.
Whatever the hyper-partisan Gensler might wish, the SEC’s jurisdiction doesn’t extend to “anything Gary Gensler thinks is important, but nothing else.” The law works by categories and objective standards, and the relevant category and standard here is materiality. In other words, if the rule is upheld, companies will then be forced to disclose everything about everything, all the time. That, needless to say, would be ruinously expensive.
This result arises because there has been, until now, a wide gulf between what might be interesting or valuable to general conversation and what is material to investors in considering whether to buy shares in a specific company. Global carbon emissions might be material to a full-and-free discussion by the American people (something not possible until the social-media overlords are recalled to their fiduciary duties and the libel laws are applied to them again) about climate change and the right ways to respond to it, but any given American company’s carbon emissions can have any effect on those companies’ bottom lines (the test for materiality) only if one presumes a long and highly contested string of hypotheticals in largely counterfactual ways.
Carbon-emission reductions by American companies can alter world climate only if the whole world goes along with western carbon restrictions. As has been discussed in these pages before, China, India and the rest of the developing world have no intention of doing that. So even at the meta level, the idea that western-company carbon emissions are meaningful is based on a profound counterfactual.
At a specific level, for carbon emissions to have effects on company bottom lines, the climate catastrophists’ (whether honest activists or the people who run BlackRock, State Street, Bank of America and others of the Davos doyens-in-their-minds) prognostications about future western-government action must be true. Western governments must legislate decarbonization according to the U.N.’s and Mike Bloomberg’s Taskforce’s highly politicized schedules. But again, this is highly counterfactual. The United States never has and never will ratify any climate treaty, from Kyoto on down. Europe’s countries have gotten heavily back into the reliable-energy business after their over-eager decarbonization plans left them open to the vagaries of economics, technology and geopolitics.
Only if countries adopt and stick to mandatory catastrophist-established decarbonization schedules that will crush their polities can companies’ carbon-producing assets become “stranded,” because by law they will no longer be permitted to be used. But because the evidence weighs against those laws getting passed or remaining in place, the “stranding” theory becomes nothing more than an unlikely hypothetical. (Ditto Larry Fink, Brian Moynihan & Co.’s grand plans to force decarbonization by enacting a private asset-stranding scenario that would deny other people’s money to companies that stick with reliable energy. States and investors are moving to break up the plans of those “public-private partnership” authoritarians, and it is likely that with the next rotation in federal office, their efforts will be shut down entirely.)
If Gensler’s carbon-disclosure rule survives, then, it will be because the courts will have agreed massively to expand the definition of “material disclosures” for the purposes of the Securities Exchange Act. Material disclosures would then include anything relating to any matter of general public interest even if the relationship between the matter of public interest and the facts at issue are only relevant to the company’s bottom line by the most tangential and counterfactual reasoning.
Under this standard, everything is material.
The new standard would quickly redound against the woke investment houses and banks that are pushing for the climate-disclosure rule. Financial institutions that invest in Chinese companies, for instance, would have to disclose everything they know or can discover about every relationship of every Chinese company they invest in (lest any of those Chinese-firm investments end up supporting, say, the Chinese munitions industry). They’ll have to do this even if the basis for believing there is such a connection is tenuous.
They’d have to disclose every activity they undertake to influence any company in which they invest in any way. Larry Fink, for example, makes great hay about his using every dollar under management at BlackRock to get companies to adopt equity-based discrimination. But there is a much stronger likelihood that such influence will result in bottom-line pummeling litigation against BlackRock (and the target companies) than that, say, Kroger’s carbon emissions can affect anything anywhere, including its bottom line. So everything a company does will have to be disclosed in expensive and eye-watering detail.
The schadenfreude involved in that result, though, cannot overcome the damage that will be caused by such an insupportable expansion of the definition of “material.”
Sensible companies will have recognized this not-very-hidden danger and stepped forward to oppose the rule, even given the SEC’s long history of petty vindictiveness. Perhaps, then, the question of “did X company oppose this rule, and how strenuously?” is the one piece of genuinely material information that will arise from this whole process.