RUTHFULLY YOURS

In his Florida v. Davos speech at last month’s National Conservatism conference, Gov. Ron DeSantis (R-Fla.) made important observations about the Environmental, Social and Governance (ESG) investing movement. He called it out as an attempt to use corporate and economic power to impose on society an ideological agenda that could not win at the ballot box.

“Corporatism is not the same as free enterprise,” DeSantis argued.

He warned of the danger from the growth of the administrative state, which he called the logical outcome of Congress abdicating its responsibility to hold the bureaucracy to account and letting it do much of the heavy legislating.

In an opinion piece five days earlier, former New York City Mayor Michael Bloomberg lambasted such Republican critics of ESG. “Critics call it ‘woke capitalism,’” he wrote. “There’s just one problem. They don’t seem to understand capitalism. And flogging ESG is not only a terrible economic mistake. It will be a political loser too.”

Bloomberg’s forecast will be tested when Florida voters decide whether to reelect DeSantis on Nov. 8.

The battle has been joined and that is good news, because it signals a much-needed debate on ESG and its climate-policy component.

Although Democrats hail passage of the Schumer-Manchin Inflation Reduction Act, far more consequential is the Securities and Exchange Commission’s proposed climate-risk disclosure rule, currently being finalized. It will operate at the nexus of the administrative state, Wall Street and politically motivated institutional investors. The Net Zero Asset Managers initiative, part of the Glasgow Financial Alliance for Net Zero (GFANZ), has 273 signatories with $61.3 trillion in assets under management.

SEC Chair Gary Gensler tries to downplay the significance of the SEC climate-risk disclosure rule. It is essentially a bit of housekeeping, he would have us believe, that would help corporate issuers more efficiently and effectively disclose their climate-related risks. But if this really were a mere tidying-up exercise, it wouldn’t need more than 500 pages of rule-making.

In reality, the proposed rule is about climate policy. Its practical effect would be to facilitate the ability of institutional investors and climate activists to impose, monitor and enforce climate targets on publicly traded companies, without obtaining explicit authorization from Congress.

Since the Supreme Court’s 2021 ruling in West Virginia v. EPA, which limited the EPA’s regulatory powers regarding greenhouse-gas emissions, the SEC proposal has come under the spotlight of the “major questions” doctrine. On matters of major economic and political significance, the agency must point to “clear congressional authorization” for the authority it claims. Less commented on is the question of whether the SEC proposal is pretextual — that is, whether the SEC’s real reason for the rule isn’t the one it’s stating publicly.

In June 2019, the Supreme Court blocked the Commerce Department from including a citizenship question in the 2020 Census because the justification for it was deemed pretextual. “Altogether the evidence tells a story that does not match the Secretary’s explanation for his decision,” Chief Justice John Roberts wrote for the court in that case. “Reasoned decision-making under the Administrative Procedure Act calls for an explanation for agency action. What was provided here was more of a distraction.”

In the case of the SEC climate-risk disclosure rule, the major-questions doctrine and whether the SEC’s justification is pretextual are linked: If the SEC believes it can demonstrate that Congress gave it authority to force companies to disclose greenhouse gas emissions so climate activists and politically motivated shareholders could impose greenhouse reduction targets on them, it would not need to camouflage its true motivation.

The reason the SEC’s proposed rule is so lengthy is that it incorporates the climate-reporting framework developed by the Taskforce on Climate-related Financial Disclosures (TCFD), established by Michael Bloomberg and former Bank of England governor Mark Carney. In February 2020, as the COVID-19 pandemic was exploding, Bloomberg posted a video on Facebook. “Climate change. It’s the biggest threat to America and the world. Full stop,” Bloomberg asserted. How do you replace dirty energy, he asked? “Stop rewarding companies from making it.” Welcoming the SEC proposal, Bloomberg said it will “accelerate the transition to clean energy and net-zero emissions.”

Carney also has been clear about the purpose of disclosure in driving climate action, tweeting in May 2021: “What gets measured gets managed. That’s why reporting climate-related financial info is critical if we are to achieve #netzero.”

Former SEC chair Mary Schapiro, current head of the Secretariat for the TCFD and vice-chair of GFANZ, explains TCFD’s motivation: “Disclosure is at the heart of reaching net zero, and the TCFD has provided a solid foundation to support the private sector’s net zero commitments through transparency and accountability.”

Four years ago, Schapiro was appointed vice chair of Bloomberg and a special adviser to its founder and chairman. In its comment letter to the SEC, Boyden Gray & Associates notes that Bloomberg owns the proprietary tools that are the preferred means for the financial sector to obtain data and would be the preferred tool to comply with the SEC’s proposed rule — virtually guaranteeing Bloomberg’s revenues would increase by billions of dollars. (Bloomberg’s suggestion that Florida’s governor doesn’t understand capitalism could be answered by saying that DeSantis understands corporatism all too well.)

SEC Chair Gensler will have an uphill job convincing courts that his proposed rule is a tidying-up exercise divorced from climate policy. The review that led to its creation was launched by SEC acting chair Alison Herren Lee in March 2021 with a statement declaring climate change and ESG “front and center” for the SEC because the agency “can help drive sustainable solutions.”

Two months later, President Biden signed an executive order on climate-related financial-risk disclosure ordering a whole-of-government approach to disclosures to achieve a target of net zero emissions by 2050. At the G-7 finance ministers’ meeting the following month, Treasury Secretary Janet Yellen signed a communiqué on “greening” the financial system to mobilize trillions of dollars needed to meet net zero commitments and supporting adoption of “mandatory climate-related financial disclosures” based on the TCFD framework.

Despite a mountain of evidence, the SEC states in the proposed rule (page 21380 of the Federal Register) that “the objective of this disclosure is not to drive targets, goals, plans or conduct.” More than being “quite a distraction,” to borrow the chief justice’s words, the SEC’s ostensible justification is clearly untrue. If implemented, it would give rise to disclosures that would systematically mislead investors about companies’ exposure to climate-transition risk, violating the mandate Congress gave the agency to protect investors.

Climate-transition risk arises from laws and regulations that force companies to decarbonize their operations. The SEC claims as the principal benefit of the rule more efficient capital allocation because “investors are better able to price climate-related risks.” The tabulations of greenhouse gas emissions that companies must report represent their global total, emitted from anywhere in the world; the emissions are not disaggregated by country or jurisdiction. The policy therefore treats the globe as a single, homogenous regulatory space. The SEC knows this is false, as it recognizes that transition risk is jurisdiction-specific.

These inescapable contradictions arise because the SEC has taken a sustainability reporting framework (the TCFD website says its framework is designed to empower “the markets to channel investment to sustainable and resilient solutions, opportunities and business models”) and shoehorned it into a climate-risk justification. The shoe doesn’t fit, but instead of admitting this, the SEC persists in a pretextual justification that the text in its own rule-making shows is a baseless fabrication.

The SEC climate proposal demonstrates a fundamental truth: ESG is the pursuit of politics by other means. This incurs costs.

The missing initial in ESG is “B” for “Beneficiary”: Investment managers have a fiduciary duty to act in the sole financial interest of funds’ beneficiaries, whose interests are subordinated when investment managers pursue extraneous objectives. Using other people’s money to pursue public policy goals undermines democratic accountability and degrades the efficiency of financial markets in allocating capital to where it’s likely to generate the most value, sapping the vitality of the capitalist growth machine.

In the energy sphere, it leads to under-investment in fossil fuels by American and Western oil and gas companies, leading to structurally higher energy prices, and it concentrates market power in the hands of non-Western nations, harming America’s national security.

Saving the planet has given rise to a confluence of interests of the administrative state, ESG investors and a billionaire whose proprietary data tools are needed to “green” the financial system. The SEC climate rule’s fate is likely to be decided by the courts on the grounds of whether its pretext comports with provisions of the Administrative Procedure Act and whether it trespasses on the major-questions doctrine.

If the rule is left standing, it will empower ESG investors to use their management of trillions of dollars in assets to take decisions with enormous consequences for the economy, for national security and for the West’s future. That is not where such political power properly resides in a democracy.

Rupert Darwall is a senior fellow of the RealClear Foundation and author of “Climate-Risk Disclosure: A Flimsy Pretext for a Green Power Grab.”