The Gensler SEC Two-Step
You may wonder with the Security and Exchange Commission (SEC) having failed to catch the most obvious and significant fraudsters—Madoff and, allegedly, FTX—how well it is performing the duties for which it was created. If you harbor any such concerns, its proposal last year –with over 100 footnotes—to require disclosure of "climate change" effects on companies’ business operations will not diminish the perception that it has gone off the rails.
The commission is currently reported to be backstroking away from this misbegotten idea. But should scrap the notion entirely as unworkable and get back to its main job for which it was created: protecting investors and the economy from fraud and manipulation of the sort that led to the Great Depression. Some background:
All publicly listed U.S. companies must file financial disclosure statements with the SEC. The purpose of an SEC disclosure statement is to provide useful information for investors about the profitability of their investments. Normally, companies are required to disclose things like debt and litigation vulnerabilities, expenses, liquidity and capital resources. Filings are reviewed by a branch of the agency, the Division of Corporate Finance:
In its filing reviews, the Division concentrates its resources on critical disclosures that appear to conflict with Commission rules or applicable accounting standards and on disclosure that appears to be materially deficient in explanation or clarity. The Division does not evaluate the merits of any transaction or determine whether an investment is appropriate for any investor. The Division’s review process is not a guarantee that the disclosure is complete and accurate — responsibility for complete and accurate disclosure lies with the company and others involved in the preparation of a company’s filings.
While the SEC lacks the power to criminally deal with false disclosure statements there are penalties for inaccurate disclosures. Among them is the power to impose substantial fines for such conduct, the penalties assessed depend on whether the misstatements were the result of negligence, fraud or failure to exercise due diligence in the issuance. It does have the power to investigate and refer cases of suspected false disclosure filings to the Department of Justice for prosecution.
SEC chairman Gary Gensler made climate-change rules a priority. Perhaps the SEC was just trying to increase jobs for professionals as it did when the government required environmental impact statements: such nonsense would also spawn a new industry of navel gazers. Unlike the rest of the normal disclosure reports, under the proposed regulations, that portion of the disclosure statement relating to the impact of climate change need not be attested to by certified accountants. Ergo, a new market for feather merchants. (And probably for law firms who will claim client losses because of inadequate disclosures.)
Here is the summary of the original proposal requiring, inter alia, disclosure of the companies’ greenhouse gas output. As the Wall Street Journal notes, the rules would be extremely burdensome:
The proposed reporting rules would require public companies to include a raft of climate data in their audited financial statements. The mandated disclosures cover everything from costs caused by wildfires to the loss of a sales contract because of climate regulations, such as a cap on carbon emissions.
Companies would have to analyze climate-related costs and risks for each line item of their financial statements, such as revenue, inventories or intangible assets. Any climate costs that are 1 percent or more of each line item total would have to be reported.
As soon as the proposal was made, companies affected noted the impossibility of the task Gensler’s crew would impose on them, in particular, reporting Scope 3 emissions, that is emissions by their suppliers and consumers. "Scope 3" emissions an outgrowth of "stakeholder" capitalism, i.e. not capitalism at all, but a lawyer's dream come true: an infinite supply of potential plaintiffs.
Scope 3 emissions are likely to be the largest share of your emissions—typically 80–90 percent. But what makes up scope 3? Essentially, all the emissions indirectly generated by a business: business travel, employee commutes, waste, purchased goods and services, the goods you produce, end-of-life disposal of your products, transportation, distribution, and more.
Take, for example, a clothing brand. Its scope 3 emissions come from an array of places—vehicles that transport clothing to retailers, energy used in manufacturing (if at facilities not owned by the company, otherwise, these would be scope 1), energy used to grow raw material, energy used by consumers to wash and dry the clothing, and the greenhouse gas generated as the materials decay in a landfill, the list goes on.
Given all that, you can see why scope 3 emissions could make your head spin, especially if you want to responsibly cut or offset your emissions. If it feels overwhelming, pause and take a deep breath. Calculating—and then cutting—your scope 3 emissions is a process that you can tackle step-by-step.
In other words, the only way to fully comply with this latest fantasy is for your company to go out of business. Voila! No more "Scope 3" emissions!
Apple Inc. says it produced 47,430 tons of greenhouse gases in a recent year. The production of its computers and phones by its suppliers, plus their transportation and use by customers, generated an estimated 22 million tons. ExxonMobil Corp. reported that it simply could not estimate emissions from transporting its oil and gas “due to lack of third-party data” and Walmart indicated it would just have to estimate the Scope 3 emissions by “scaling up emissions reported by the fraction of suppliers making disclosures.” To suggest that requiring emissions figures from all a company’s suppliers and consumers would be “burdensome” is to grossly understate the case. In any event, such a wide-reaching search for carbon emissions most certainly seems beyond the SEC’s authority.
It’s certain that unless these rules are substantially scaled back the SEC will face substantial legal challenges, as companies contend that they’d be forced to undertake “extremely difficult, if not impossible” analyses. Even the premiere virtue-signaling asset-managing firm BlackRock complained that disclosures would be “highly inaccurate and force unduly burdensome costs” of reporting companies.
We’ll see how Gensler's fantastical SEC adventure goes. In the meantime, at least one company is pulling away from this climate change-carbon reduction parade. BP announced this week that it was backing off from its earlier announced plans to convert to low or non-carbon energy. Investors cheered the decision and the stock has a significant price rise. How about that?