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.

We're all doomed, as usual.

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!

They're everywhere!

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?

As 'ESG' Falters, the Left Seeks to Rebrand

As Clarice Feldman has explained here at The Pipeline, the Wall Street enthusiasm for ESG (environmental, social, and governance) investing is already starting to wane. Which means the greens will go back to the drawing board, and will bring it back again under a new name. ESG is mostly a cover for "climate change" and social-justice activism, and as such its real agenda is to divert private capital to politically-favored causes, such as “green” energy and disguised redistribution schemes benefitting favored client groups like Black Lives Matter.

Investment funds that follow the ESG mantra are suffering from sub-par investment returns, and suddenly fear shareholder lawsuits for failing their fiduciary duty to maximize returns. Moreover, the attempt to enshrine ESG by regulation through the Securities and Exchange Commission (SEC) is running into political opposition on Capitol Hill and appears vulnerable to legal challenge. Suddenly the biggest boosters of ESG investment, and especially de-investing in oil, natural gas, and coal production, are backtracking, with J.P. Morgan CEO Jamie Dimon telling Congress last week that cutting off credit to fossil-fuel production would be “the road to hell” for America. Late in the week the state of Louisiana announced that it was pulling all of its assets invested with BlackRock, one of the prime cheerleaders of ESG.

On the "road to hell."

ESG is likely to persist, however, on account of its unseriousness and malleability. Several traditional domestic oil producers, like heavy fracking user Diamondback Energy, have received high ESG ratings from the third-party gatekeepers of ESG seals of approval through the simple expedient of buying “carbon offsets” and pledging themselves to be fully carbon-neutral . . . someday. Think of it as the environmental version of St. Augustine’s famous intercessory petition, “Lord, make me chaste—but not yet.”

ESG should be regarded as the third iteration of the left’s attempt to co-opt corporate America, which they otherwise hate, under the banner of “corporate social responsibility” (or CSR). CSR attempts to blur the lines between shareholders and “stakeholders,” that is, self-appointed advocates who want businesses to serve some special “social” interest as defined by the advocacy groups. But such “stakeholders” have neither a tangible “stake” in the businesses they mau-mau, nor do they represent anyone but themselves.

Roll back the calendar about 20 years, before the term ESG was coined, and you find the same essential idea marching forward in the business community under the slogan “triple-bottom line” (or BBB). This was the hey-day of “sustainable development,” and it was proposed that in addition to the traditional accounting measures of profit-and-loss, businesses should formally include new accounting measures of “environmental and social performance.” Exactly what these accounting measures might be were never specified with any rigor.

"Sustainable" green heaven for you and for me.

Important voices in corporate America immediately rolled over for this flim-flam. PricewaterhouseCoopers published a “sustainability survey” of 140 major U.S. corporations, arguing that “companies that fail to become sustainable–that ignore the risks associated with ethics, governance and the ‘triple bottom line’ of economic, environmental and social issues–are courting disaster.” The triple bottom line, PwC concluded, “will increasingly be regarded as an important measure of value.”

The CEO of Monsanto at the time, Robert Shapiro, wrote that “We have to broaden our definition of environmental and ecological responsibility to include working toward ‘sustainable development'." This groveling did nothing to reduce the Left’s hatred of Monsanto, or prevent endless lawsuits against Monsanto for the sin of producing Roundup and other useful products.

Perhaps the most egregious corporate suck-up to the CSR/BBB nonsense was Enron which, it is conveniently forgotten today, was the environmental lobby’s favorite energy company right up to the moment it imploded partly because its fraud was based on the hope that it could dominate trading in artificial “markets” for greenhouse gas emissions credits. (Enron was a cheerleader for the Kyoto Protocol that the U.S. Senate had indicated it would never ratify.) In January 2001, a Bear Stearns analyst cited Enron’s planet-friendly orientation in concluding: “We believe that Enron should be compared to leading global companies like GE, Citigroup, Nokia, Microsoft, and Intel, and that its valuation reflects this eminence.” The Bear Stearns note predicted Enron’s stock was going to $90 a share, but in less than 12 months, Enron was bankrupt and its shares worth zero. (And we all know what happened to Bear Stearns.)

There was even a “Dow Jones Sustainability Index” (DJSI) formed in 1999 to track the performance initially of 300 supposed BBB companies, though a close look at its composition found that there was less than met the eye. The DJSI added and deleted companies on their list with surprising frequency, with criteria that confessed to being politicized. Its process of sustainability analysis included reviewing “media, press releases, articles, and stakeholder commentary written about a company over the past two years.” (Emphasis added.)

The DJSI still exists, even though there are now several ESG indices competing with it. Despite its flexible criteria, the DJSI lagged the Dow Jones Industrial Average significantly. Over the last decade it has achieved an annual return of 5.2 percent, while the DJIA has returned 15 percent per year, and the S&P 500 14.8 percent. There is no compelling statistical evidence to validate that “socially responsible” corporations are more profitable or are better investments than companies not on the green bandwagon.

The best commentary on “corporate social responsibility,” no matter how cleverly defined, still comes from Milton Friedman’s observation made sixty years ago in Capitalism and Freedom:

Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their shareholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?

You'll own nothing and be happy.

As we can see with this long-term perspective, “sustainable development” and the “triple-bottom line” gave way to “Net-Zero” and ESG, which are just like “sustainable development” in that their imprecision allows for lots of cheating and self-serving definitions by both government and the private sector alike. ESG will likely start to fade from public view, and eventually the left will come up with some new term replete with with its own jargon and imaginary concepts. And as before, craven and gullible business leaders will fall for it, and the cycle will repeat itself.

Securities and Exchange Commission Tackles 'Climate Change'

On March 21, the Securities and Exchange Commission (SEC), by a 3-1 majority (the lone Republican Hester Pierce voting against the proposal), drafted rules that will further burden all American energy production and thus hamper economic growth. The proposal would require listed companies to disclose to investors how their future value might be impacted by climate impacts or reduced demand for fossil fuels. Specifically, they must disclose:

  1. The "carbon footprint" of its operations.
  2. How much energy the company uses.
  3. If the company is a large one, the emissions from its supply chain and customers.

Of course, for fossil fuel companies customers account for the majority of the emissions it must disclose. The whole point of a SEC-mandated disclosure is to give investors relevant information about the company in order to make wiser investment choices. Not specified in this category is how much of these emissions are “material” to its investors, which you can be certain will be a topic of substantial litigation.

The draft rules provide a backdoor for climate activists “to use a ‘layer of bureaucracy to enact their radical agenda that failed to get approved by Congress.”  The rules would increase job opportunities and benefits for anti-corporate, anti-energy non-governmental agencies, a plethora of “climate certification consultants," accountants, auditing firms, and lawyers. The remoras attached to the bureaucracy—parasites who constitute no small part of the present administration’s remaining backers—are the winners if this goes into affect.

Your tax dollars at work.

The proposal is not self-enforcing. There’s, of course, an opportunity for comment and the proposed rule will not be finalized until sometime this summer. Likely objections include that it exceeds the SEC’s legal mission; and that it requires companies to disclose information that's immaterial to investors and therefore violates the Supreme Court’s rulings that the SEC cannot require disclosures that are not material to investors.

Certainly, the objections will also include a claim of impossibility—that is, without an agreed method for calculating the emissions from its supply chain and customers, compliance would be costly and subject the companies to litigation from claimants arguing the disclosure was inaccurate. The requirement that businesses must disclose even those "greenhouse gas" emissions that are produced indirectly by their operations illustrates how burdensome and preposterous this is—how to document company transportation, the vehicles used to transport what they produce and even employee business travel?

In the face of galloping inflation and rapidly rising energy costs, this proposal should be a non-starter in a rational world. It’s flatly ridiculous. Add to the mix of considerations, the fact that the suicidal energy policies of the Europeans and the Biden administration have impoverished their citizens, created supply shortages of everything including medicines and food, and increased the political power of Russia, and you are hard-pressed to justify this intrusive, costly bureaucratic overreach.

Unless of course, you are an environmental activist whose litigation teams are hell bent on slaying the sky dragon presently known as  “climate change," or a  partner in an auditing firm that that will be in high demand to fact-check these disclosures lest companies run afoul of fraud laws. When companies prepare disclosures to comply with SEC regulations, third parties must be engaged to check it, and the Big Four accounting firms may not be in the best position to audit these climate audits, so voila! A new industry—climate consultants—will be in the money.

Oh, and don’t forget, financial institutions at the trough. Already, Stripe, which is the foundation for most online payment processing, has established a climate research team. It already allows businesses to redirect some revenues to carbon removal technologies. Will it and/or other financial institutions, use the disclosures to deny financial assistance to businesses? Guess.

Once the comment period closes and the SEC issues final regulations, there will be an opportunity for parties with an interest to litigate these rules. I am certain there will be many challenges.