This week, the House Financial Services Committee is set to hold two hearings with key officials from the Securities and Exchange Commission (SEC). One of these hearings will include the commission’s chief economist, Dr. Jessica Watcher, who will be answering questions about the SEC Regulatory Accountability Act. The topic is timely, as the commission is currently working on finalizing their proposal on climate disclosures, which fell short when estimating how much the proposal would cost.
Though the SEC is obligated to provide a credible cost-benefit analysis for all their rules, several cost categories were not considered in their own estimate, such as the broader impacts to the economy. I conducted a study evaluating the proposal, which found it would cost $25 billion in U.S. GDP each year and result in 200,000 fewer jobs by the late 2020s — suggesting that further investigation into the broader economic impacts and costs is warranted before enactment.
Reducing the workforce by those numbers is roughly equivalent to one month’s worth of normal U.S. job growth between now and 2024, and annually from 2025 onward. Key industries will be disproportionately impacted more than others, including manufacturing, construction and energy — sectors the country needs to promote economic vitality and business competitiveness.
The SEC’s estimate only includes direct compliance costs for the regulated companies and ignores how the rest of the economy may be impacted, including through reductions in domestic business competitiveness, retail investor returns, and market inefficiency from a resulting misallocation of resources.
This narrow approach helps explain how the SEC estimates the rule will only cost $490,000 to $640,000 per company to comply in the first year of the rule, which is lower than my estimate and others’.
The SEC’s estimate appears to be most aligned with a study commissioned by environmental organization Ceres and carbon accounting startup Persefoni (which appear likely to benefit from the rule by providing climate data to firms). Yet, even their joint study still comes in with a per company compliance cost that’s higher than the SEC’s, at $677,000.
Aside from my study, other reporting and surveys have indicated company executives estimate the cost for compliance could be at least 25 percent higher — which would more than double the current total cost of compliance, from $3.85 billion to $6.37 billion.
Beyond cost, findings from a recent Pricewaterhouse Cooper and Workiva report reveal that 85 percent of executives worry they don’t have the technological ability to comply in the first place, and that half are “very concerned” about the rule’s micro-management.
The sheer complexity of quantifying climate change and natural disaster impacts create a burden on employees and outside experts just to ensure there is a common understanding to avoid future litigation risks.
Separately, the spending requirements for companies when hiring third-party contractors to verify their disclosures pose another compliance problem. The flow of money to outside auditors will be large due to the limited supply of service providers as well as the difficulty in tracking down obscure data like Scope 3 emissions.
The effects of the rule will extend beyond the companies who will need to invest in new resources and reporting expertise. If Scope 3 estimates are required, many small, private companies who work with publicly traded companies will be forced to report as well. Investors could see diminished returns through lower profits and dividends. Smaller companies may be forced to endure slower growth trajectories due to tighter balance sheets and inhibited capital formation. Employment opportunities could also be diminished.
Contrary to the SEC’s mission, the rule may harm investors more than it helps inform them since the rule itself is a material risk.
Given the potential outsized impacts, the SEC should review these costs before moving forward with a final regulation. While climate disclosures may be useful to some investors looking to make decisions based on projected climate change impacts to business, many specialized funds already exist for investors interested in doing this. The proposed rule comes with a significant cost burden, which seems unwarranted for the benefits accruing to the standard investor.
If spurring climate action is truly the underlying goal of the rule, this rule may result in exactly the opposite of its intended effect. The rule as proposed reduces incentives for Congress to engage in comprehensive, legislative policy, which in turn results in delays to meaningful action and therefore larger environmental damages. The commercial and industrial sectors only represent 30 percent of climate change emissions, so other important economic sectors, including residential, government and nonprofits, are not covered.
The only truly effective and efficient way to make progress on climate change will be to comprehensively price carbon emissions within the economy, which will require legislative action. Outsourcing action to un-elected government officers may be politically expedient, but it is not an effective or efficient way to run an economy or to tackle the climate change problem.
Matthew Winden, Ph.D., is an associate professor of economics in the University of Wisconsin-Whitewater’s College of Business and Economics.