The federal Securities and Exchange Commission’s proposal mandating public companies disclose climate-related risks is the latest in a series of moves by President Joe Biden and his progressive coalition to kneecap America’s oil and gas industry.
The SEC proposed rule would require public companies to submit far-reaching data on the potential environmental impact of their activities and their financial exposure to climate-related risks. The proposed rule change under the Securities Act and the Securities Exchange Act follows a nearly two-year effort by the Biden administration to curtail domestic energy production.
When combined with the growing influence of Environmental, Social and Governance (ESG) investment funds that typically shun oil and gas industry stocks, the proposed disclosure rules are fueling a historic supply crunch in U.S. energy markets. Domestic production is down to roughly 11.6 million barrels per day, compared to its peak in 2019 of 13 million barrels, contributing to the current price spikes and volatility.
At a time when the market is desperate for more supply, it doesn’t require a sophisticated observer to recognize that the SEC’s climate rule is guided by political motivations rather than economic logic.
While most of the Biden administration’s climate agenda has stalled in Congress and the courts, the White House is counting on its chosen appointee at the SEC, Gary Gensler, to deliver a climate victory. A recent move to curtail new oil and gas leasing on federal lands was rejected by a federal court as an overreach of the executive branch’s authority. Meanwhile, signature climate provisions within President Biden’s Build Back Better proposal, including a clean electricity standard and carbon tax, have run into resistance in Congress from moderates from the President’s own party.
Following these setbacks, the SEC’s proposal marks a new phase in the administration’s climate policy. The President’s new approach marshals the federal government’s financial regulatory agencies to shove the economy toward a Green New Deal in the capital markets. The disclosure proposal requires public companies to report climate data in their annual financial filings with the SEC, including measurements of their GHG emissions, climate-related financial expenditures, company transition plans, and climate scenario analyses.
While proponents argue the new rules will provide investors with important information about a company’s exposure to climate-related risks, the practical effect will be to add to the already chilly investment environment around U.S. energy producers.
If implemented as proposed, the rule will drive capital investment away from badly needed conventional energy projects and infrastructure. And while the rule will undermine U.S. energy security, it will do nothing to address the demand for oil and gas.
SEC Commissioner Allison Herren Lee, who initiated the Commission’s original focus on mandatory climate disclosure last year when she was the acting Chairman, stated that the proposal can be used to “more broadly inform the wider spectrum of climate policymaking.” The Task Force for Climate Related Financial Information, a prominent private disclosure standard-setter that the SEC has based its proposal on, describes itself as a framework to “empower … the markets to channel investment to sustainable and resilient solutions, opportunities, and business models.”
You don’t have to squint too hard to see the real intent of the SEC proposal. Mandatory disclosure will drive the shift in investment flows by providing ESG funds regulatory cover to prioritize “environmental sustainability” over economic returns for investors when ranking funds. Many asset managers have told the SEC in public comments before the proposal that they intend to use new climate data to transition investment away from energy portfolio companies that fail to address conditions of “declining demand.” That position seems radically out of synch with current conditions in the market.
There are also the scores of shareholders and environmental activists who intend to use the new climate data to starve energy firms of resources, including by launching costly lawsuits when climate-risk estimates made in good faith prove to be inaccurate.
The proposal also includes language aimed at influencing the decisions of private companies, including requiring companies to mitigate climate-related emissions by consumers far downstream of production, so-called indirect Scope 3 emissions. As the CEO of a private company not directly affected by these reporting requirements, it’s clear the SEC intends to raise the cost of capital needed for us to do business.
Finally, there is the reality that today’s disclosure will underpin more severe actions from financial regulators in the future. Members of the Financial Stability and Oversight Council, emboldened by a broader mandate to reduce systemic risk in the financial system, will use climate to increase the costs of borrowing capital for emissions-intensive businesses. They may also impose a cap on greenhouse gas emissions for common types of registered investment funds.
Financial regulators’ shift toward prioritizing climate change over returns will end badly for the U.S. economy and consumers. It’s bound to restrict investment into finding and producing conventional energy supplies and usher in a more extreme version of the demand shock we’re experiencing today.
Regulators make poor capital allocators. Free markets that can react to sudden supply and demand changes are much better at channeling investment.
The federal government’s attempts to influence capital markets will leave consumers – and our economy – out in the cold. The Biden administration must not allow the SEC to take control of America’s energy policy.
Those of us in the industry see both the solutions and impediments to a secure energy future. A greater role for the SEC in the energy market falls squarely into the latter category.