A Distracted--But Fixable--Mission at the SEC: Both businesses and regulators must stay true to their core missions instead of being drawn to the cause of the day.

• Author: Ramaswamy, Vivek

Over the past two years, the SEC has proposed a bevy of new rules on ESG issues. These rules--while largely couched in terms of "disclosures" --not only will create new burdens on corporate America, but also will direct the flow of money to particular favored causes.

Take the proposed climate disclosure rule. The proposal--a staggering 534 pages long--would require publicly traded companies to disclose information on greenhouse-gas emissions and risks related to climate change. Companies now do financial accounting; soon, they will have to do climate accounting too. The Wall Street Journal called it "one of the Biden administration's potentially most significant environmental actions to date."

There's a lot in there. Every company must disclose its own greenhouse gas (GHG) emissions and the amount of energy it consumes. But many companies also have to disclose Scope 3 emissions --that is, the emissions of every supplier, vendor, employee and worker across its "value chain"--even if the company does not believe such emissions are financially material. More specifically, the proposed rule would require any company that has pledged net-zero goals to now disclose its Scope 3 emissions and report on them in SEC filings like its annual report.

It's true that many companies were pressured in recent years to make high-level commitments to reducing their carbon footprint, reaching net zero 25 years from now, setting GHG targets, etc. But they viewed these commitments as voluntary, and, in some instances, as little more than feel-good affirmations of socially accepted norms. Now, however, any company that issued such a PR statement will be required to make a detailed accounting of every source of emissions connected in any way to its business. When companies were making these pledges, they had no idea they were signing up for this level of scrutiny or potential liability. The lone dissenting SEC Commissioner, Hester Peirce, explained that companies are in for a "rude awakening" once they learn "they are going to be playing an entirely different game, at far higher stakes."

The rule also requires companies to disclose whether climate change may affect more than 1% of any line item--like revenue or debt--and explain the impact. Such requirements are not just burdensome, but impossible to determine. It requires speculation piled on top of speculation to guess what the climate trajectory will be, what the resulting regulatory landscape will look like in...