by Tanner Nau
In March of 2022, the Securities and Exchange Commission (SEC) proposed new regulation for SEC registrants to disclose all climate-related information and effects of business operations. The registrants, being all publicly traded companies, would be subject to disclosing “climate risks” on certain financial statements and accounting reports to provide investors with information pertaining to the climate to assess investment risk.
These regulations do not just apply to the operations within the specific companies traded, but also extend to other entities in the business operations that contribute to “Scope 3” emissions. Scope 3 emissions are defined by the SEC as “greenhouse gas emissions from upstream and downstream activities in its value chain.” A value chain is a process of adding value to a specific product to prepare it for the consumer, while a supply chain is the process of steps to produce the product. Both processes within the production of goods will be subject to climate impact examination.
Almost every corporation utilizes another company to provide raw materials, power, or shipping logistics to produce or deliver their products, many of whom are not registrants under the SEC. Because of the vast nature of pinpointing the exact elements and origin of production as noted in Leonard E. Read’s essay, I, Pencil, the SEC would be indirectly regulating companies that are associated in any way with the business operations of the publicly traded company.
The SEC would be indirectly regulating companies that are associated in any way with the business operations of the publicly traded company.
Numerous issues come up with this proposal, the first being that many of these producers of raw materials or intermediate goods are not registrants of the SEC. This is key in understanding the vast overreach of the SEC in their climate proposal. Now, regulatory procedures will be extended to non-registered companies that supply public-traded companies with their products. The SEC’s jurisdiction is companies that are publicly traded, and their mission is to protect investors from manipulation of the financial health of companies as well as fraud that inaccurately displays a company’s performance. In this case, however, the SEC is delegating its authority to matters beyond financial manipulation and fraud outside of their jurisdiction. No matter how pressing the issue of climate change may be, the Securities and Exchange Commission does not have the authority to regulate companies outside of their jurisdiction.
In addition to the SEC’s regulatory overstep, the effect this will have on the agriculture industry is concerning. If gone into effect, companies will demand such greenhouse gas emission data and information from their suppliers no matter how feasible that may be. If the supplier or farmer cannot feasibly provide such information, the company must presumably end their business with them. A vast majority of farms around the country do not have a compliance office to take care of such data collection, nor do they have the money to hire someone to do so. In addition, the act of computing greenhouse gas emissions for all business operations such as fuel in equipment or even methane emissions by livestock would be extremely time consuming and expensive for companies to produce.
With various supply chain issues facing the United States, implementing new regulations will further slowdown American consumers’ access to food. Noted by the American Farm Bureau Federation, many farmers would have to adopt new software platforms that they cannot afford, nor operate efficiently due to technological restraints in rural areas. Small farms will feel the blunt force of this regulation more than the intended corporations, because of the costly and dubious information they must harvest and provide to their consumers that fall under this regulation. With the increase in new regulations, products could see a substantial price increase to make up for the newfound regulatory expenses it will take to comply. Grocery costs have already increased by a staggering 10 percent from March of 2021 to March of this year, with this new regulation only causing it to rise even more, hurting the low-income populations that rely on cheap food prices.
With various supply chain issues facing the United States, implementing new regulations will further slowdown American consumers’ access to food.
A May 2022 survey by The Sustainability Institute showed that many corporations are already reporting such climate disclosures. One hundred percent of the issuers surveyed disclose their greenhouse gas (GHG) emissions annually, spending an average of $237,000 to do so. This does not include separate entities, but only the specific business operations, not taking into consideration upstream and downstream activities.
The ability to report such data to potential investors provides a company with a competitive advantage over other companies that choose not to. The competitive aspect of the market should not be removed by this new regulation, because if investors feel so strongly about needing this data to make informed investments decisions, they will choose to consider those companies who voluntarily choose to disclose it and not consider those that do not. Corporations such as Exxon already provide robust figures about their sustainability and climate footprint. The power of investor demand, if so prevalent, should be able to convince all financially able companies to take part in this “climate conscious” endeavor without regulatory intervention.
This new proposal by the SEC will have many unintended consequences on not just companies within their governing power, but those outside of it.
This new proposal by the SEC will have many unintended consequences on not just companies within their governing power, but those outside of it. This is going to make doing business harder and more expensive for small businesses at a time when these companies are vital in supplying our nation with important resources. Instead of providing incentives to these downstream companies, the SEC will impose their regulatory will on them, even when they are not under their authority. This is another example of an overbearing bureaucratic overreach that translates into higher costs for business owners and American consumers.