Gary Gensler Stages a Climate Coup


The U.S. Securities and Exchange Commission headquarters in Washington, D.C.


Al Drago/Bloomberg News

Russia’s assault on Ukraine is changing the world—except Washington, D.C., where the Biden Administration is continuing its war on fossil fuels as if energy security doesn’t matter.

The latest strike came Monday when the Securities and Exchange Commission voted 3-1 to advance a proposed rule requiring public companies to disclose climate risks. The proposal, which was issued with only Democratic votes, is contrary to SEC history, securities law, and sound regulatory practice.

Public companies are already required to report “material” events and risks, which the SEC defines as information a reasonable person would consider important. SEC Chairman

Gary Gensler

is redefining materiality as whatever


and progressive investors want to know. The 510-page proposal will require the public disclosure of risks to physical assets from climate change as well as from government anti-carbon policies.

Companies will have to report greenhouse-gas emissions generated directly by their operations (e.g., refining oil) as well as from their energy consumption. Companies will also have to report what are called Scope 3 emissions from their supply chains and customers if they are material, which will be in the eyes of progressive investors.

For example,

Exxon Mobil

would have to report its direct emissions as well as any from fossil fuels burned to generate the electricity it uses. It may have to quantify emissions from the combustion of its products, the tankers that deliver them, and the manufacturing of its rigs and plastic products when they degrade.

Scope 3 emissions have no clear definition. The agency says it has “not proposed a bright-line quantitative threshold for the materiality determination” for Scope 3 emissions because this “would depend on the particular facts and circumstances, making it difficult to establish a ‘one size fits all’ standard.”

Yet the overall rule would impose a one-size-fits-all regulation on thousands of public companies. A property and casualty insurer’s exposure to flood or wildfire zones is probably material. Ditto direct emissions of fossil-fuel producers that operate in jurisdictions with carbon taxes or cap-and-trade systems. But carbon emissions aren’t relevant to the financial performance of most public companies.

The SEC claims to have “broad authority to promulgate disclosure requirements that are ‘necessary or appropriate in the public interest or for the protection of investors.’” But neither securities law nor the Constitution lets the SEC mandate whatever public disclosures some investors or politicians want.

In 2015 the D.C. Circuit Court of Appeals ruled that an SEC disclosure mandate for so-called conflict minerals violated the First Amendment because it compelled speech. Government can require companies to disclose information to prevent fraud or protect public health, but how does requiring companies to report greenhouse-gas emissions do either?

As a fall-back argument, the SEC claims climate disclosures “will promote efficiency, competition, and capital formation.” They will do the opposite. They will saddle companies with new costs, discourage private firms from going public, and encourage some public firms to go private.

Mr. Gensler’s solution is to regulate private companies by the back door. To calculate their Scope 3 emissions, public companies will have to make their private business partners and contractors report emissions. Companies will also have to get their emissions independently certified. That’s another government gift to the Big Four accounting firms.

We’ll take up the rule’s financial benefits to the ESG (environmental, social and governance) crowd another day. The main intent of the rule is to make it easier for left-leaning asset managers like BlackRock, public pension funds and trial lawyers to bully companies. Public companies will be liable for climate disclosures the SEC deems inaccurate or incomplete.

Mr. Gensler is providing a liability “safe harbor” for Scope 3 emissions, but there is no political safe harbor. Progressives will have a new weapon to smack companies around. Democrats can’t pass their climate agenda through Congress, so they are using financial regulation to block investment in fossil fuels.

Vladimir Putin

will be delighted.

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Appeared in the March 22, 2022, print edition as ‘Gensler Stages a Climate Coup.’


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