Climategate: The SEC Takes On ... Climate Change

Corporate disclosure of material information is a good thing, even though few people bother to read the stuff. It would be great were the scientific community to adopt disclosure requirements similar to those imposed on U.S. corporations. It would also be great were folks such as the chairman of the UN climate change body to take the personal responsibility expected of corporate CEOs. Free beer for all would also be neat.

Aside from an apparent goof in what its spokesmen said on January 27, there are several problems with the SEC's interpretative guidance, and perhaps some good things as well; the latter probably fall into the unintended consequences category. Among the problems is that the guidance requires that businesses speculate about the impact of things nobody knows will happen, or if they happen what form they may take. It is extraordinarily difficult to guess correctly what politicians and bureaucrats may do, particularly in an ideologically and politically driven context such as climate change. To the extent that actual climate change (as distinguished from statutes, treaties and regulations) is concerned, the situation is no better; only St. Al the Gored knows for sure. In any event, a certified oracle is needed because a wrong guess may well result in corporate liability. Guess that the impact will be insubstantial, and an investor who thinks any climate mucking about by the government will be calamitous is likely to become litigious. Guess that the impact will be catastrophic, and members of WWF and other proponents of such mucking about are likely to become litigious. Offended people often seek to assuage their hurt feelings by filing lawsuits.

To many, climate change legislation and treaties (as distinguished from administrative regulations) seem as likely as a blizzard in Florida during July. Could they happen? Maybe. Are they likely? Probably not. Still, there may be a substantial likelihood that a "reasonable shareholder" would view an omission to disclose their possible impact as having altered the "total mix" of information available; if "climate change legislation, environmental regulation, and international climate treaties" happen, it is anybody's guess what they might entail. These problems put corporations between a rock and a hard place and are exacerbated by the continuing Climategate scandals and the persistent revelations that something is rotten in Denmark; even India doesn't think much of the United Nations' Intergovernmental Panel on Climate Change, headed by its own guy.

About the only climate change laws likely for the foreseeable future are regulations imposed and to be imposed by the Environmental Protection Agency (EPA), and they are of dubious legal validity. Even some Democrats in Congress are trying to put "caps" on the EPA's regulatory emissions; it's officially bipartisan:

Reps. Collin Peterson (D-Minn.) and Ike Skelton (D-Mo.) -- who head the Agriculture and Armed Services committees, respectively -- introduced a plan Tuesday that would prevent the Environmental Protection Agency (EPA) from placing limits on heat-trapping emissions from power plants, factories and other sources.

"I have no confidence that the EPA can regulate greenhouse gases under the Clean Air Act without doing serious damage to our economy," Peterson said in a prepared statement. "Americans know we’re way too dependent on foreign oil and fossil fuels in this country -- and I’ve worked hard to develop practical solutions to that problem -- but Congress should be making these types of decisions, not unelected bureaucrats at the EPA."

Mr. Peterson also observed that "such regulations would go beyond the original intent of the act. ... It was meant to clean up the air, to get lead out of the air. It was not meant to fight global warming."

There is no truth to any rumor that Punxsutawney Phil has become a consultant to the EPA or to any law firm specializing in securities regulation, even though it might be a good idea; he's a down-to-earth type of guy and is more often right than wrong. On February 2, Phil saw his shadow when he emerged and there will therefore be six more weeks of winter weather. On February 3, a blizzard was headed toward the East Coast. On February 4, the prediction was for sixteen to twenty-four inches in Washington, D.C. Obviously, Punxsutawney Phil is a very prescient guy; he would probably do a better job than many consultants.

Here's the potentially good part: The new interpretative guidance may, and probably should, encourage corporate entities to use their 10K and other SEC filings as bully pulpits to attack potentially harmful climate change legislation, treaties, and regulations. For a corporation to claim that actual climate change will help or harm it would be foolish; it would be a very dubious claim and could easily lead to litigation.

True, it seems unlikely that many investors actually study 10K and other required filings; they are written as CYA exercises, not to be read. Aside from their prolixity and difficult to read nature, they resemble the ubiquitous warnings required by California as to things it has determined cause cancer. However, the financial press frequently studies 10K and other such filings. Should significant corporations use them to disparage (or, for that matter, to claim that they will be substantial beneficiaries of) climate legislation, regulation, and treaties in legally required documents which thereby assume a patina of truthfulness, they may find better informed, less allegedly biased and more vocal advocates for those positions than they currently do. It will be easier and less expensive for them than the paid corporate advertisements recently permitted by the Supreme Court's decision in Citizens United. The potential for out-in-the open lobbying is there, and it simply has to be used.

It is uncommon for a federal regulatory agency to mandate disclosures which by virtue of the law of unintended consequences might do some good. Still, that's what the SEC appears to have done.