Featured Expert Contributor, Corporate Governance/Securities Law

Stephen M. Bainbridge is William D. Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law. This post is reprinted with his permission from the ProfessorBainbridge.com blog.


post at the Harvard Corporate Governance Forum reports that:

On February 24, 2021, SEC acting chair Allison Herren Lee announced that she has directed the Division of Corporation Finance to enhance its focus on climate-related disclosures in its reviews of corporate filings. This follows the SEC’s announcement on February 1, 2021 of the appointment of its first-ever senior policy advisor for ESG issues.

Acting chair Lee has asked the staff to review the extent to which public companies are following the interpretive guidance concerning climate change disclosure issued on February 2, 2010 and to begin updating the guidance based on its findings. …

This week’s The Economist predictably claims this is “good news for investors.”

To be clear at the outset, I believe climate change is taking place and that human activity is contributing substantially to the rising temperatures. I also firmly believe in reducing our carbon footprint. I also don’t believe we can solve climate change without carbon capture and solar geoengineering.

Lastly, however, I don’t believe climate change disclosures by public corporations in the US will contribute to solving global climate change.

1. Even if we assume that climate change disclosure would lead to public corporations reducing their carbon output, it would still be at best a minor change. It doesn’t effect output in other countries. As The Economist observes:

… more climate disclosure will not by itself cut carbon, notes Remco Fischer of the un Environment Programme. Regulatory climate risk can, in theory, be mitigated by moving carbon-heavy assets somewhere with laxer environmental rules. And sophisticated risk assessments do not always result in decarbonisation.

SEC mandated climate change disclosures also won’t do anything to address carbon outputs by private US companies.

2. Why do we assume that disclosing climate-related risk factors will bend the curve on climate change? As The Economist admits:

The data are shoddy and climate-risk reporting is largely voluntary. Firms tend to cherry-pick the most flattering numbers and methodologies. The reporting seldom reveals anything about a firm’s risk in the future—which is where the financial threats from climate change mostly reside.

Given that reality, how will disclosure change corporate policy? The Economist speculates that it “may drive up capital costs for polluting projects and lead to fewer emissions.” May being the key word. The Economist cites France’s experience that financial firms making climate change disclosures reduced investment in fossil fuel companies. But I’m skeptical. The logic of climate change disclosure lies in its purported in terrorem effect. The claims made by proponents of climate change disclosure are analogous to claims made by proponents of fossil fuel divestment–indeed, the logic of climate disclosure is that it will lead to dome level of shareholder disengagement–and will fail for the same reasons:

The fossil fuel divestment campaign makes demands that no corporate executive could ever meet. … no executive at a tobacco company is going to close down shop simply because do-gooder investors won’t buy his company. Similarly for fossil fuel companies, the threat to share price from announcing that 80% of reserves will not be extracted is exponentially greater than the minor threat posed by a few universities and churches selling their shares in these companies.

Suppose (hypothetically) that many large shareholders begin to sell their shares in an entire sector of the economy that happens to be hugely profitable. What could be expected to follow?

The first most likely occurrence is that other shareholders will see that profitable energy companies are available at a discount, and will buy these discounted shares (and hold them). Less scrupulous investors buy when churches and universities sell. The net result: less opportunity for shareholder engagement on environmental issues, and no impact on the target company’s operations.

The second possibility is that the energy companies will just become privately held. Plenty of capital exists in the world that relish the opportunity to own the world’s largest energy companies, and better yet to be free of the increased regulatory burdens that often fall on publicly held corporations.

3. Climate change disclosure is likely to be hugely expensive. The Economist acknowledges that “Many bosses claim their firms lack the expertise to do climate-based scenario analysis,” but then The Economist laughably suggests that the Task Force on Climate-Related Financial Disclosures’ “recent 133-page how-to guide may help.” If the instructions are 133 pages long, how long will the disclosures be? And how much will it cost to generate them?

In sum, climate change disclosure will not save the planet. It is just a tax on companies to provide political theater by which the Biden Administration can appease the increasingly hard left progressive wing of the Democratic Party.