Stop the SEC’s power grab to require emissions disclosure

At the end of June, the U.S. Supreme Court decided in West Virginia v. EPA that the Environmental Protection Agency had exceeded its congressionally mandated authority when it essentially shuttered coal power plants across the country based on new regulations during the Obama administration. Now, Patrick Morrisey, the attorney general of West Virginia, has written to the Securities and Exchange Commission (SEC) proceeds with a proposed regulation to require extensive disclosures on greenhouse gas emissions from publicly traded companies.

Any and every step to prevent this potential SEC train wreck should be welcome. That’s why it is good news that Morrisey, and likely others, will stand up against this power grab. In rejecting the EPA’s “Clean Power Plan” regulations that would close so many coal power plants, Chief Justice John Roberts wrote, “It is not plausible that Congress gave EPA the authority to adopt on its own such a regulatory scheme.” 

The same can be said for the SEC’s desire to regulate disclosure of greenhouse gas (GHG) emissions by public companies. After all, the SEC was created by Congress for a different purpose. As explained in Section 2 of the 1934 Securities Exchange Act, the SEC was formed “to provide for regulation and control of such transactions and of practices and matters related thereto … to require appropriate reports, to remove impediments to and perfect the mechanisms of a national market system for securities and a national system for the clearance and settlement of securities transactions and the safeguarding of securities and funds… .”

Congress did not task the SEC in the 1930s with monitoring GHG emissions from public companies or policing environmental policies — and it has not tasked the SEC with that job since then. The SEC’s mandate is to regulate stock trading and protect investors, according to Congress. And that is all that should matter. 

Of course, that may not be enough to keep this SEC out of the business of overseeing carbon emissions by America’s corporations. So, it’s important to also note that there is no effective way for the SEC to regulate greenhouse gas emissions disclosures from publicly listed companies. The regulation would require companies to report three types of emissions, called Scope 1, Scope 2 and Scope 3. 

Under the rule, public companies would be required to report on their own GHG emissions from direct operations (Scope 1), GHG emissions from utilities consumed by their operations (Scope 2), and even their indirect GHG emissions, including those of suppliers and from transportation of the companies’ goods (Scope 3). While estimates of Scope 1 can be made with some reliability, Scope 2 and especially Scope 3 cannot be provided accurately.

According to a Harvard Business Review article, “Most companies know only a few of their non-tier-1 suppliers and customers well enough to get meaningful data from them.” The authors describe measuring Scope 3 emissions as a “near impossibility.” Companies that voluntarily report Scope 2 and Scope 3 emissions almost always rely on industry averages for Scope 3 and regional averages for Scope 2. Even then, these companies have been found to selectively report these emissions in order to portray themselves in the best light.

Even the SEC recognizes that it is unreasonable to expect companies to consistently provide accurate numbers of their Scope 2 and Scope 3 emissions. Accounting is impossible. Because the SEC understands this reality, embedded within the regulation is a safe-harbor from any litigation that companies might face because of inaccurate Scope 3 reporting. Essentially, the SEC is saying these companies must put in the time, effort and money to report their emissions but without any expectation that they can or will report accurately.

Then what is the purpose of this reporting requirement and who will benefit? The SEC itself estimates that added disclosure expenses from this proposed rule will be $420,000 per year for a small publicly listed company and $530,000 per year for a larger firm. These annual expenses are on top of the compliance costs of up to $10.2 billion for business, per the SEC’s own estimates.  

Someone is getting that money. The new industry of greenhouse gas emissions auditors — which will not even be required to be accurate at least for Scope 3 reporting — will prosper. Whether these are existing auditors who merely expand their businesses or an altogether new cadre of environmental auditors, this rule benefits them far more than shareholders, the American public or the environment.

Whatever steps Morrisey and his colleagues take to stop this regulation will be worthwhile. 

Ellen R. Wald is a senior fellow at the Atlantic Council’s Global Energy Center, and president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise. Follow her on Twitter @EnergzdEconomy.