Comment on Climate Disclosure

From my comment to the Securities and Exchange Commission on ESG (environmental/social/governance) disclosure, including responses to the appalling claims made by people more interested in profits than the market forces they claim to exemplify, plus an example of 18th century ESG disclosure:

The accountability processes of government and business are each ideal for optimizing different policy issues, and we get into trouble when we let one take on the role of the other. What has made the US capital markets the most robust and respected in the world is the combination of market- and government-based structures and especially the comprehensive transparency of our public companies. The nature of capitalism is to maximize profits, and it is up to the government to make sure that happens without externalizing costs onto the public who have no capacity to provide a market-based response. Corporate executives would always prefer less disclosure. Investors would prefer more. Because of the collective choice problem, there is no way for investors to make a market-based demand for more information as effectively and efficiently as having the government set the floor for what must be disclosed.

It is within this context that the questions will always arise about when it is time to add more to the already extensive information that issuers must provide to investors. As the request for comments and Commissioner Lee’s outstanding presentation on materiality suggest, that time has come for ESG. The reason it is the fastest-growing sector of investment vehicles [1] is a reflection of increasing concerns about the inadequacy of GAAP numbers in assessing investment risk. Let me emphasize that; ESG and climate change disclosure concerns are entirely and exclusively financial. That is what makes them a have-to-have, not a nice-to-have.

This is not surprising. After more than a century of working with GAAP, there is still a lot of inconsistency in the way accounting rules are applied. GAAP may allow for a lot of options in disclosing the value of factory equipment, but at the end of the process, hard assets are something you can count and the tax code is helpful, too, in validating those numbers. And GAAP is based on data that corporations are already required to disclose in fairly consistent apples-to-apples form. ESG, which is a recent response to the inadequacy of GAAP in assessing investment risk, is still in its earliest stages. ESG factors are inadequately and inconsistently disclosed and harder to…