Beware the ‘gotcha’ weaponization of proposed SEC climate rules
Donald J. Kochan
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The Securities and Exchange Commission’s climate change disclosure rules are advertised as serving the benign purpose of informing investors and the public. But the rules are actually designed to create litigation minefields, within which disclosures compelled by these rules have the potential to blow up in a disclosing company’s face.
It is often true that the more consumers and investors know, the better. In fact, there are very strong incentives built into a free market for companies to provide information to incentivize purchases or investments in their enterprise.
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Most of the time, when there is a demand for information, the market kicks in to supply it at an optimal level that satisfies the need at the lowest cost possible. In other words, consumers and investors do not actually want unlimited information because information is costly. And, at some point, the marginal value of the next bit of information does not outweigh the marginal cost — including as reflected in increased prices or decreased profits because information disclosure is not free.
Sometimes, however, regulators do not trust that the market is supplying enough information. They mandate that companies make certain disclosures, even when it adds costs that the consumers or investors would not have demanded. Setting aside whether such intervention is ever justifiable, there certainly should not be disclosure mandates from legislatures or administrative agencies that have ulterior motives.
Yet, that is what we increasingly see from agencies with ambitious leaders, and influenced by powerful activists, who seek to effect broader societal changes under the guise of seemingly benign disclosure mandates.
The rules the SEC seeks to promulgate in final form in April fit this bill. The disclosures mandated in these rules can be coupled with existing liability laws to become a powerful arrow in the quiver of climate activists.
One of the stickiest reasons why corporate statements matter is that the law allows shareholders to bring direct or derivative lawsuits if they can claim they relied on questionable statements of corporations or corporate officers in making their investments. The recent lawsuit against Elon Musk for a tweet noting “funding secured” for taking Tesla private is the latest popular example of these vehicles being used by shareholders to sue corporations and corporate officers for allegedly false, misleading, or inaccurate statements.
Disclosure rules are often motivated by the desire to create “gotcha” moments that aspiring plaintiffs can use as the basis for bringing a lawsuit. The more a corporate officer speaks, the more risk there is that one thing or another that he says might become the basis for such a lawsuit. Hence, when the government compels more corporate speech on specific topics, the lawsuit landscape necessarily widens.
Here’s how this could play out under the SEC climate disclosure rule. Corporation X makes some claim about its climate risk in its SEC disclosures. Innovative plaintiffs allege that the statement is false or inaccurate. Even small miscalculations of the risk — say, emissions that accidentally exceed projections, newly discovered information that a plaintiff could claim the company should have known before making the statement, or other aspects of a disclosure that, in hindsight, are open to question — can form the basis of such that the disclosure was false, incomplete, or inaccurate.
The driving force behind the SEC climate disclosure rules is not experts in financial policy nor even a desire to protect consumers from market manipulation or fraud. Rather, the interest groups behind these climate disclosure initiatives are plaintiffs’ attorneys and environmental activists. These are the groups pushing for more “climate” impact disclosures because they understand the ability to weaponize those disclosures and punish corporations and their officers down the road. The disclosure rules, in short, are a trap.
They also represent unnecessary red tape for the regulated companies that simply cut into dividends or add to the price of goods for the persons the rules purport to protect. Concurrently, however, they serve as valuable red velvet lining for the coffers of the plaintiffs’ bar and the agendas of the climate activists. They have litigative, not investor-protective, uses for the disclosures at top of mind when lobbying for these rules.
As the SEC and the courts evaluate the utility and legality of the proposed or final SEC disclosure rules, which have plenty of additional infirmities not discussed here, it is important to look behind the curtain and reveal who has what to gain by creating this new layer of compliance costs. And those who might be required to make these disclosures should be worried about the litigation time bomb hidden within the proposed rules.
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Donald Kochan is a professor of law and the executive director of the Law and Economics Center at George Mason University’s Antonin Scalia Law School.