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Climategate: The SEC Takes On ... Climate Change

The Securities and Exchange Commission (SEC) is a venerable agency. It was established in 1934, and Joe Kennedy was the first chairman. In the interest of full disclosure, my dad as a young lawyer worked for him and occasionally took the Kennedy kids for walks. I worked there one summer as an intern. I suppose there may be a soft spot in my heart for the SEC.


The function of the SEC “is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”:

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: All investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

On January 27, the SEC announced new interpretative guidance requiring publicly traded companies to provide information about the impact on their businesses of “risks and potential impacts of climate change legislation, environmental regulation, and international climate treaties” in their periodic “10K” filings.

A February 27 press release by Elisse B. Walter, the commissioner of the SEC, which earlier appeared at the link cited immediately above, seems to have been replaced by a statement by SEC Chairman Mary Schapiro.

Commissioner Walter’s statement noted, among other things, that the possible impact or lack thereof of actual climate change did not have to be reported; instead, only the anticipated governmental response to it had to be reported. The text of the guidance is provided here. It does note reporting requirements as to “physical impacts of climate change,” so perhaps  Walter misspoke.


Courts generally give substantial deference to agency interpretations of the laws such agencies enforce. While it continues to be up to the companies involved to decide upon the materiality of any impact, Walter noted (in her apparently no longer available statement):

The Supreme Court has already provided guidance to publicly held companies in TSC Industries when it said that “it is appropriate that these doubts be resolved in favor of those the statute is designed to protect.”

Here is the crux of what the Supreme Court said in TSC Industries:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. … It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

It is perhaps significant that  Schapiro said:

We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.


It is also perhaps significant that since the Court in TSC Industries spoke in the context of proxy materials, the guidance offered by the SEC presumably applies to proxy materials, registration statements, quarterly reports, annual reports to stockholders, and the like as well.

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.

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