The SEC's Risky Plan To Decarbonize The U.S. Financial Markets

Authored by Paul Tice via RealClearEnergy,

Reports of the impending death of the Environmental, Social, and Governance (ESG) movement have been greatly exaggerated.

While several sustainability-minded companies and Wall Street firms have recently adopted a lower ESG profile due to the public backlash, this is largely a tactical retreat until the government provides air cover. Financial regulators are now riding to the rescue, passing rules that make the entire climate-focused ESG system compulsory and prescriptive.

In March 2024, the Securities and Exchange Commission (SEC) issued final climate disclosure rules that require every large U.S. corporation to report in detail all the climate-related physical and transition risks faced by their businesses, along with the size of their carbon footprints.

The new SEC rules will force the management of all reporting companies to act as meteorologists and disclose every conceivable weather impact to their businesses over exceedingly long investment horizons, thereby reinforcing the climate change narrative. They will also discourage investment in the traditional energy sector by highlighting the outsize regulatory, litigation, contingent liability, and reputational risks now facing the industry due to government climate policies.

However, rather than de-risking the financial markets by improving disclosure for investors as promised by the SEC, the agency’s new rules will have the opposite effect. By imposing a climate test on all issuing and investing companies—basically, every financial market participant in the U.S.—the SEC’s goal is to help force the clean energy transition by stigmatizing carbon-emitting industries in general and specifically redirecting capital flows away from fossil fuel producers.

The SEC’s climate disclosure rules are part of the federal government’s coordinated climate plan and the latest piece in a sweeping regulatory attack on the oil and gas industry since President Biden took office. Defunding oil, gas, and coal companies arguably represents one of the most effective ways to shrink domestic hydrocarbon supply and cut national emissions.

Decarbonization, which the SEC’s rules will now abet and accelerate, is the real threat to the American economy and the U.S. financial markets. If the current administration succeeds in its goal of reducing U.S. net greenhouse gas emissions by 50%–52% by 2030 versus a 2005 baseline—on the way to net-zero emissions by 2050—the macroeconomic impact will be decidedly negative.

For starters, it will competitively hamstring the U.S. economy while doing nothing to solve the purported problem of global climate change since most developing countries—particularly China and India—are not playing by the same climate rules. Notwithstanding reports to the contrary, there is no global energy transition currently underway.  Since 1990, when the United Nations first started warning the world about the dangers of man-made global warming, annual global greenhouse gas emissions have increased by more than 50%, mainly due to the continued use of fossil fuels (especially coal) by developing countries.

Increased U.S. reliance on intermittent wind and solar power generation while simultaneously electrifying whole new swaths of the economy—starting with transportation—will strain and destabilize the American electricity grid and increase electricity prices across the board.

Constraining the domestic production of fossil fuels will lead to higher oil and gas prices, which will feed through the entire U.S. economy and raise the cost of almost everything, especially food. A regulatory-forced downsizing of the domestic oil and gas industry will also lead to significant job losses and shrink U.S. GDP, while the failure to maintain American energy independence will heighten national security risk for the country.

Germany’s recent economic woes show what lies in store for the U.S. if the Biden administration continues down its current climate policy path. Since embarking on its Climate Action Plan 2050 in 2016, Germany, the largest economy in Europe, has gone from the growth engine of the E.U. bloc to the “sick man of Europe” as climate-driven energy policy mismanagement has led to a downward spiral of deindustrialization and degrowth over the past decade.

There is no evidence that economic growth can be decoupled from emissions or fossil fuels. Aggressive emissions reduction during the current decade will result in a diminished U.S. economy by 2030, one marked by anemic growth, higher inflation, increased unemployment levels, and a hollowed-out domestic industrial base. It is difficult to see how such a macroeconomic backdrop would be constructive for Wall Street or Main Street.

Decarbonized financial markets will be, by definition, more volatile, riskier, and less diversified, with fewer investment choices for investors. Since energy-consuming industrial, utility, and technology companies represent the lion’s share of most benchmark U.S. stock and bond indexes, this will amplify the market’s exposure to fluctuating energy prices. Average U.S. corporate credit quality—especially for energy and other heavy industry—is also likely to trend lower by the end of the decade, with bankruptcy and debt default rates moving higher. By 2030, the U.S. may resemble an emerging country’s financial market more than a developed one.

The SEC has now stayed the implementation of its climate disclosure rules pending the resolution of the various lawsuits that are challenging the rulemaking on the grounds that it exceeds the agency’s statutory authority. Issuing climate disclosure rules as a backdoor means of changing the U.S. energy mix and restructuring the overall economy would seem to go well beyond the SEC’s role as the top cop for the U.S. financial markets.

Most egregiously, with these climate disclosure rules, the SEC will no longer be an objective market referee, at least when it comes to the ESG factor of climate change. The SEC will now become an active partisan player in the Biden administration’s drive to decarbonize the U.S. economy, in direct contravention of its regulatory mandate to remain impartial and simply ensure full disclosure and fair dealing across well-functioning financial markets. By mandating the integration of climate factors into both corporate policy and investment risk management, the agency will be supplanting the governance role of corporate executives, bank credit officers, and investment portfolio managers.

By attempting to achieve specific market outcomes based on an emissions litmus test, the SEC will also be picking corporate winners and losers and influencing asset pricing and financial market access by tilting the playing field away from traditional energy and other high-carbon-emitting sectors, which is an inversion—if not a perversion—of the SEC’s regulatory function.

Paul Tice is a senior fellow with the National Center for Energy Analytics and author of the new report “The SEC’s Climate Rules Will Wreak Havoc on U.S. Financial Markets.”