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October 31, 2016 01:00 AM

New climate disclosure would add no value for investors

Wayne Winegarden
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    With only a few months left in office, President Barack Obama's administration seeks to step up climate change disclosure, raising implications for corporations and asset owners.

    National Economic Council Director Jeffrey Zients and White House senior adviser Brian Deese unveiled in August a proposal to require public companies to disclose more information about their climate-related economic risks.

    As a means to protect investors, the new policy won't accomplish anything beyond what existing disclosure rules already require. As a tool for publicly shaming traditional energy companies, however, the reform has great potential. And that is exactly its purpose.

    In their proposal, which they outlined in a recent commentary, Messrs. Zients and Deese recommend that the Securities and Exchange Commission “adopt detailed and standardized industry specific requirements for disclosure, and, once in place, aggressively hold public companies to account when it comes to those obligations to disclose.”

    At first glance, the plan looks uncontroversial. After all, it's only fair for publicly traded companies to be upfront with investors about risks that could impact future earnings. What could be more reasonable than a SEC requirement to include the financial risks associated with climate risk? If you believe Messrs. Zients and Deese, it's surprising that such a commonsense rule isn't on the books already.

    As it turns out, it is. In fact, the SEC has a number of rules that require public companies to disclose climate change-related risks.

    For example, according to a the SEC's “Guidance Regarding Disclosure Related to Climate Change,” companies must report how their compliance with federal, state, and local environmental regulations may affect “the capital expenditures, earnings and competitive position” of the business.

    Moreover, according to the SEC guidelines, companies must disclose any risks deemed material. That is, risks to which “there is a substantial likelihood that a reasonable investor would attach importance” when deciding whether to buy, sell or hold a stock. So, if a company's future could be jeopardized by a climate-related event — whether a drought, a flood, or for that matter, a new green energy regulation — investors are informed.

    And, also as outlined in the climate change disclosure guidance, companies that are involved in legal proceedings that concern regulations related to “the discharge of materials into the environment” or “protecting the environment” must also inform investors.

    So the proposed rule is repetitive to an already extensive set of disclosure requirements, and it's unclear how the Deese and Zients proposal would interact with these existing rules.

    Messrs. Deese and Zients also argue in their commentary that their new disclosure standards “will ensure that the market has the transparency and data it needs to efficiently price climate risk.” But again, investors already have access to the information they need to evaluate a given stock. A separate, climate-specific disclosure rule wouldn't add to market efficiency — nor would it make investors any safer from fraud or dishonesty.

    Such a rule could, on the other hand, force companies to cough up any and all information the administration deems relevant to climate change — whether the firm has an emissions-reduction plan in place, for instance, or whether it sponsors campaigns to raise awareness about climate change.

    Again, these disclosures would do nothing to advance the interests of shareholders. But they would play into the hands of environmentalist activists.

    Green activists have already proven adept at shaming companies they find objectionable. In particular, campaigns encouraging pension funds and other institutional investors to abandon oil, gas, and coal stocks have made significant gains in recent years. To date, this movement has muscled 436 institutional investors into committing to shed their holdings in fossil-fuel companies, according to a report from Arabella Advisors, a Washington-based con-sulting firm whose focus includes working with investors on impact investing programs.

    Many political leaders have been eager to lend their support to the movement. California Gov. Edmund G. Brown Jr., for example, signed legislation last year requiring the $305.8 billion California Public Employees' Retirement System and the $193.2 billion California State Teachers' Retirement System to divest from investments in coal companies.

    The new disclosure rule would only add momentum to such efforts. Once implemented, the policy would make any company activity remotely related to climate change potentially subject to federal regulation. And once climate risk becomes a legitimate category in the SEC's rules, green activists will have a much easier time weaponizing the financial sector against their political opponents.

    At a minimum, the reform would create stacks of new paperwork for companies. That's irresponsible in its own right, given that SEC itself estimates that the average public company already spends $1.5 million per year on compliance with SEC rules.

    But what's most discouraging is how brazenly the proposal abuses executive authority for political gain. The climate-risk rule won't reduce fraud in our financial markets, nor would it help combat global climate change. Its only real effect will be to punish companies that aren't in lockstep with the administration's environmental agenda.

    The purpose of the SEC is to protect investors, not to advance an environmentalist agenda. That the president would spend his last days in office on such blatant political maneuvers is saddening indeed. His administration should nix its ill-thought proposal.


    Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute, San Francisco.

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