Law and finance professors from across the country have criticized the Securities and Exchange Commission’s (SEC’s) March 21 proposal to compel climate-related disclosures by public companies, arguing that the move exceeds the SEC’s authority and reflects the outsized influence of “institutional asset managers who are managing other people’s money, not their own.”
“Rather than provide investor protection,’ the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models,” the academics wrote in an April 25 letter to the SEC.
“I joined the letter because I believe the SEC is overstepping its authority,” said Jonathan Berk, a professor of finance at Stanford University, in an email interview with The Epoch Times.
“I don’t like the precedent that appears to be set, that now the SEC becomes the arbiter of what risks investors should care about,” he added.
“I have heard confidentially from many law firms, current and former government officials, and professional associations who have said that the issues we identified and explained will be helpful to them as they parse the proposal and formulate their own comment letters on the proposal, or potential lawsuits if the SEC proceeds with the rule,” said Lawrence Cunningham, the lead author of the letter and a law professor at George Washington University, in an email to The Epoch Times.
“I have heard from a dozen scholars in our field agreeing with the thrust of the letter and offering to add their names,” he added.
Authored by 22 academics from major institutions such as Harvard University, Yale University, George Mason University, Northwestern University, and Stanford University, the letter argues that investors lack any meaningful consensus on climate change, raising doubts about claims of uniform “investor demand” for sweeping SEC regulations.
“People’s opinions differ sharply, and investors have varied views on issues associated with the earth’s climate,” the authors note.
“Climate models are imprecise and were not designed for the purpose of measuring risk exposure. Using them to measure exposure would be irresponsible,” Stanford’s Berk told The Epoch Times.
The letter also takes issue with the proposal’s emphasis on global financial consortia organized by the United Nations, including the Glasgow Financial Alliance for Net Zero and the Net Zero Asset Managers Initiative.
“The United Nations is neither a business nor an investor and lacks any relevant expertise in either domain. It is a political institution coordinating international policies on contentious topics, including as an incubator of the concept of ‘ESG’ and climate management that provide the backdrop for the Proposal,” the letter states, referring to the abbreviation for ‘environmental, social, and governance.’
“The Proposal relies heavily on global institutions and institutional investors incorporated outside the U.S. It is not obvious that such institutions share any concern for American competitiveness,” it later notes.
The professors contend that a uniform rule mandating financial disclosures could greatly benefit index fund managers, who may want to market their ESG bona fides while offloading the associated costs on companies subject to the proposed rules.
“The Proposal fails to assess how its rules will affect different segments of the investment industry differently; it also fails to consider alternative approaches that would avoid favoring some sectors at the expense of others,” the letter states.
“The investors demanding climate-related information are overwhelmingly institutional asset managers who are managing other people’s money, not their own.”
The letter argues that the Environmental Protection Agency (EPA) has had statutory authority over climate-related disclosures since the passage of the Clean Air Act in 1974, meaning the SEC’s new rules may overstep its bounds.
Similarly, it contends that the proposal may tread on territory long covered by state corporation law, and it argues the rules could compel speech, thereby violating the First Amendment.
The letter also questions the SEC’s cost-benefit analysis, pointing out that it seems to ignore China’s rapidly increasing greenhouse gas emissions.
“Without a meaningful impact on China’s greenhouse gas emissions, the Proposal, even if implemented, will not have a meaningful impact on climate change,” it states.
The letter concludes with an analysis of the SEC proposal’s citations, saying they “skew heavily toward organizations that are prominent environmentalists, not prominent investors.”
The most cited organizations in the proposal include the EPA, the Natural Resources Defense Council, and UN Principles for Responsible Investment (PRI).
The SEC’s proposal moved forward in March with a 3-1 vote. All three Democratic commissioners voted for it, while the lone Republican currently serving on the SEC, Hester Peirce, voted against it.
In a statement titled “We Are Not The Securities and Environment Commission–At Least Not Yet,” Peirce explained why she found the planned rules so troubling.
“We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in magnitude and cost and probably outpace it in complexity. The building project upon which we are embarking will consume our attention and enrich many, as any massive building project does,” she wrote.
Berk, of Stanford, said he hopes the letter will “make the SEC pause since it is clear from the letter that the legal basis for this action is flimsy, and that if they continue, there is very likely to be a court challenge which I believe is likely to prevail in the end.”
Cunningham, of George Washington University, told The Epoch Times he has only received a handful of comments from opponents of his letter. He characterized those objections as “very disappointing.”
“Rather than engaging with our letter (or reading it) and the question of SEC authority, these comments rail against climate change generally or attack me and the other signatories personally. But while such childish vitriol is annoying, I remain optimistic that at least the SEC staff will engage thoughtfully with the issues we raise,” Cunningham said.
The SEC initiated a 60-day comment period on the proposed rules in late March. That comment period has since been extended to June 17.
The Epoch Times has reached out to the SEC for comment.