Jun. 10, 2022
\*** I urge the Commission to NOT ADOPT Release No. 33-11042; File No. S7-10-22 (The Enhancement and Standardization of Climate-Related Disclosures for Investors) for the following reasons. First, the proposed rule will impose substantial costs on public companies. Second, increasing the cost of being public will decrease the number of public companies and increase the number of private companies – with its attendant cost to society of increased opacity on all other dimensions of public disclosure that would otherwise occur. Not only will it further reduce the incidence of IPOs in the future, it will increase the number of going-private transactions. In addition, it will increase the propensity of firms to merge – mergers that will be the result of public companies seeking to realize regulatory efficiencies (in contrast to obtaining operating efficiencies that improve consumer welfare through lower marginal costs and prices). Indeed, in cases in which regulatory efficiencies from a combination exceed the dis-efficiencies on the production side of the business, it is possible that some such combinations will produce higher marginal costs (and therefore higher prices) in spite of the private interest the companies have to reduce regulatory compliance overhead through merger. Third, if this rule is approved, the SEC will be putting its thumb on the scale of the market for corporate governance--in an unhelpful and inefficient fashion. Historically, Boards are expected to maximize shareholder value. Even though some Boards are straying from this singular objective and may incorporate antithetical objectives in their maximization function, the Commission is ill-advised to require Boards to incorporate the proposed processes and disclosures into their governance policies. Shareholders (and the market for corporate control) are more than adequate to achieve the ends that shareholders seek. If one or more Commissioners (and public citizens) believe that Boards of public firms should be constrained in the proposed manner (or any other manner inconsistent with maximizing shareholder value) they should be encouraged to contact their legislators. Imposing such a constraint through regulatory fiat is fundamentally dangerous because of the enhanced difficulty of reversing such a rule that is imposed through the regulatory process (in contrast to the legislative process). Moreover, this rule will impose a new constraint on public firms seeking to maximize shareholder value. Firms will now maximize subject to the climate disclosure mandate, which cannot make shareholders better off. If the market for creating shareholder value is unaffected by this rule, then shareholders will of course not be worse off—but of course there would be no purpose for the rule. If, on the other hand, the rule alters corporate conduct among public companies, then the SEC will inevitably destroy shareholder value. The proposed rule cannot be justified on the basis of curing an externality. This because the proposed rule can be avoided by staying (or going) private. Moreover, the SEC has no mandate to cure such an externality, even if it could (the government has at least one organ that possesses authority in this area—the EPA). In addition, the proposed disclosures and conduct are clearly within the province of the legislature. The SEC will be creating opposition to its very existence by stepping outside its regulatory lane. I am not saying you would be committing regulatory suicide by adopting this rule, but it will be one more straw on the camel’s back. Stephanie Arnold