The SEC’s Climate Proposal Sets Table For Netherlands-Style Farm Crisis In The U.S.

Environmental policies to fight climate change are now being used to make life impossible for farmers, especially ranchers. This is increasingly looking like a coordinated effort against the Western world’s agricultural sector. The U.S. is the next target.

At a time when large multilateral institutions like the World Bank are talking about supply chain crises, and politicians are calling for reshoring critical supply chains from microchips to energy, radical environmental measures such as those being imposed in Europe will almost certainly lead to near-term food supply chain disruptions and the offshoring of native grown and raised food in favor of those grown and raised in countries that do not enforce similar restrictions on their agriculture. It will be too expensive to do so domestically. Farming becomes a quaint hobby instead. Because the regulatory burden and financial pressures to adhere to ever-more restrictive environmental policies will remove many players from the market, leading to market consolidation and greater import penetration.

It started in The Netherlands.

The Netherlands is home to the world’s biggest agricultural export terminal, and to global financiers ABN Amro, ING Group, and Rabobank, as well as Uniliver, a conglomerate waiting for the “new foods” market to take hold. This includes high-tech, laboratory grown meats made from animal stem cells. These three banks, Unilever, and many others quietly push for stricter environmental rules on ranchers and farmers through associations like the Carbon Disclosure Project and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).

The result?

Dutch farmers protested their country’s policy to reduce emissions. Protests have now spread across Germany, Italy, and Poland. The Netherlands government is the tip of the spear. They say emissions of methane, nitrogen oxide, and ammonia, which livestock produce, must be drastically reduced.

Over the last week, the Trudeau administration said it wants to enforce a 30% reduction in “carbon emissions”, citing environmental harms caused by Canadian farmers. Now they are protesting, too.

Oddly enough, this policy decision will hurt smaller to midsized family farms much more than it will the corporate-controlled industrial farms that many environmentalists have long opposed.

Can such a policy take root in the U.S.?

Yes, it can.

In fact, the Securities and Exchange Commission (SEC), of all places, has released a proposed rule on climate change for publicly traded companies. The proposal is part of the investment world of Wall Street, London, and Frankfurt’s new favorite product line — Environmental, Social and Corporate Governance banking, known as ESG. ESG investing affects portfolio manager decisions and corporate lenders. “E” is the main one as it is easily sold to companies and the public as a means to rollback climate change.

The SEC’s ESG proposal creates a framework for lenders and investors, requiring publicly traded companies to list their prescribed environmental impacts along their supply chain. This would make gauging carbon footprinting more uniform so everyone knows what is required to be ESG investment eligible. That’s the SEC’s main goal, it says.

If enacted, the rule would require big food companies like Tyson and Smithfield Foods, owned by China, and JBS and Marfrig, both Brazilian, to report to the SEC how their farmers are impacting the environment.

In other words: didn’t reduce fertilizer by 30%, for example? Sorry, can’t buy your beef. Too many bovines releasing methane into the air? Need a smaller herd. No loans from Bank of America for you. And sorry, your beef is a climate risk according to ESG adherent Rabobank. That means Rabobank might not provide the big agriculture exporters with trade finance as punishment for not being ESG enough.

This is coming to the U.S. unless big food exporters successfully lobby to stop it. It is unclear if they are even against it. All of their lenders want it, so they may be forced to go along with it. Others are invested in alternatives to traditional means of food production and alternatives to animal protein. It is almost impossible to find an investment firm, lender, or asset manager against the SEC’s proposal.

Their comment period was loaded with investors praising the proposal.

If these protesting European and Canadian farmers are right, then this will be a disastrous policy for American ranchers. But it will be a win for large corporations who will likely buy up smaller ranch operations, or let them go broke and import what they need from Brazil, where ESG is merely a feel-good acronym for bankers and asset managers who want to sound like their friends in London and New York.

What the SEC has Proposed

The Securities and Exchange Commission proposed a new rule on March 21, 2022, requiring publicly traded companies to disclose extensive climate-related information in their SEC filings.

The proposed rules are far more prescriptive than the principles-based regulation the prior SEC leadership embraced, White & Case lawyers said. The new rules would require integration with the company’s internal controls, audits, and risk disclosures.

Critics say it will require overly broad disclosures and oblige companies to rely on imprecise assumptions made by their source providers – in this case, American farmers raising cattle and pigs.

Two weeks ago, many House Financial Services Committee members said in a hearing with Gurbir Grewal, director of the SEC’s Division of Enforcement, that the agency was overstepping its boundaries. Representatives from farm states were particularly livid.

Rep. Ann Louise Wagner (R-MO-2) spoke to Grewal about the Greenhouse Gas Emissions risk section of the rule. This section would require food producers to report on what their farmers are doing to reduce emissions. This falls under the so-called Scope 3 emissions definition.

“Issuers (companies selling stocks and bonds) will be required to provide very detailed climate data including downstream Scope 3 emissions that include their client emissions,” Wagner said. “Operationally, how do you plan on enforcing cases involving Scope 3 emissions?”

Grewal noted that the entire policy initiative is investor-driven.

Grewal: On the enforcement side, we know that ESG is important to investors and we know investment advisors are marketing ESG funds. We can bring cases against issuers that lie about their statements like we did against (mining company) Vale in Brazil. We are relying on experts.

Wagner: Experts? Really? Is the SEC now an expert on climate policy?

Grewal: We’ve retained experts on climate policy.

Wagner: What statute provides the SEC with the direct authority to regulate climate change?

Grewal: In a litigated matter, they would be anti-fraud violations of the federal securities laws.

The proposal defines “climate-related risks” as the actual or potential negative impacts of climate-related conditions and events on the company’s financial statements, business operations, or supply chains as a whole.

A publicly traded company would be required to describe how it defines short-, medium-, and long-term time horizons, environmental risks, and how it plans to mitigate them over time. This is all geared toward reducing the main greenhouse gases, like methane.

While this affects all companies doing business with publicly traded companies, in keeping with the focus on agriculture, the Scope 3 emissions would mean that the roughly 2,000 pig farms in the U.S. that Smithfield Foods contracts with would now be part of its climate risk. If investors pressured Smithfield to lower their emissions, Smithfield would turn around and pressure those farmers. Or, they would invest in pig farms in China instead and export to the U.S.

Even when Scope 3 emissions do not quantitatively represent a relatively significant portion of overall greenhouse gas emissions, the proposed rule indicates that companies must consider qualitatively whether Scope 3 emissions from their suppliers are a material risk factor, or “if there is a substantial likelihood that a reasonable (investor) would consider it important.”

ESG policies are creating a new food market, one in which there is little to no demand, and punishing traditional producers as, perhaps, an unintended consequence. Food imports will rise if the SEC goes through with its proposal because of the regulatory burden; competitors from foreign farms and meat packers are not worried about ESG oversight. If Bank of America doesn’t want to lend to meat packers and ranchers in Brazil, a Brazilian or Chinese bank will do it.

Who is in Favor?

The SEC admits where this idea comes from.

Several major institutional investors, which collectively have trillions of dollars in investments under management, have demanded climate-related information from the companies in which they invest because of their assessment of climate change as a risk to their portfolios and investments generally. They also got into this because they want to satisfy some of their investors’ interest in companies considered “sustainable.” The SEC says this in their proposal.

These primarily European, Canadian, and American investment firms have formed advocacy groups to urge companies to collectively provide better information about climate risk. They are also lobbying governments to do the same.

Who are these groups?

In 2019, more than 630 investors collectively managing more than $37 trillion created the Global Investor Statement to Governments on Climate Change urging governments to require climate-related financial reporting. It is run through the United Nations, but the U.N. is not the brainchild of this statement.

This investor initiative bred the Investor Agenda’s 2021 Global Investor Statement to Governments on the Climate Crisis, which was signed by 733 global institutional investors, including some of the largest investors, with more than $52 trillion in assets under management. (U.S. GDP in 2021 was around $23 trillion). They called for governments to implement a number of measures, including mandating climate risk disclosure. The SEC is listening to them. The Netherlands already has. Canada wants to. It is unclear if the Canadian Parliament will stop it.

The SEC said that unless companies follow these proposed guidelines they “may, in turn, create transition risks for companies that are seeking to raise capital.”

The SEC devised its rule based on the non-profits funded by these same banks and corporate food conglomerates.

The same backers of the SEC climate rule are the old globalization financiers and multinationals who prefer global supply chains which has led to the the hollowing out of U.S. production in favor of low regulation, low tax, and low labor cost countries. These policies threaten to force producers to exit the market. And it is unlikely poorer countries, including big food producers like Brazil, would go along with these policies, citing issues of sovereignty.

The organizations that support the SEC rule are largely unknown to the general public and to members of Capitol Hill. They include Amsterdam-based Global Reporting Initiative, CDP (once officially called the Carbon Disclosure Project), London-based Climate Disclosure Standards Board, San Francisco-based Value Reporting Foundation (formed through a merger of the Sustainability Accounting Standards Board and the International Integrated Reporting Council), and the TCFD.

The SEC said their climate-related disclosure framework was modeled in part on the TCFD’s recommendations. Michael Bloomberg, a former presidential candidate, New York City mayor, and best known for creating the Bloomberg investment terminal and newsgroup, is the chairman of TCFD. Their vice chairman is Graeme Pitkethly, CFO of Unilever UK.

Another banker and multinational corporation advocacy group behind the push for a 30% reduction in greenhouse gas emissions is the Global Roundtable for Sustainable Beef (GRSF). This group was on the receiving end of a two million euros grant by The Netherlands government to convince buyers of beef – like WalMart and McDonalds – to exert pressure on farmers in the name of ESG principles to reduce emissions.

This group counts ranchers and ex-ranchers on its board. Some are not happy with the SEC’s proposal, but they will not find allies there.

The GRSF’s president is from Tyson Foods. Tyson is investing heavily in the aforementioned high tech synthetic, lab made meat alternative to traditional animal protein production. China is becoming a big player in this space, so one can imagine where the work will be outsourced to eventually.

GRSF’s Treasury Secretary is from Rabobank. They’ve backed non-farm raised meat made from stem cells for years.

What Congress Says About the SEC Rule

Senators Elizabeth Warren (D-MA), Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) all wrote in support of the proposal. Rep. Sean Casten (D-IL-6) also supports.

During a heated House Financial Services Committee hearing on SEC Oversight last week, Director Grewal said in his opening testimony that companies of all types, not just agriculture, needed to realize they “are in a time of rapid technological change and public companies need to think about how their products act with emerging risks and tailor their internal controls to compliance practices and be proactive with compliance. We will push enforcement action. But we face significant challenges to investigate and enforce compliance.”

Companies are going ahead with that compliance because of their lenders. And they are slowly making their way down the supply chain. Some of them are sending questionnaires to their suppliers asking ESG-related questions. The food sector is top of mind because of the protests in Europe, and the importance of the agriculture sector to the U.S. economy. But all companies would be impacted if they have a publicly traded company for which they produce goods.

A partial transcript from the House Financial Services hearing with Grewal:

Rep. Bryan Steil (R-WI-1): I’m really concerned about the SECs climate disclosure proposal. You’ve got American businesses suffering through high inflation, labor shortages, supply chain issues and at the same time the SEC wants companies to spend money on what I view as non-material climate change related items. I think this will be difficult to implement. Scope 3 emissions will be especially difficult. We need to know who these experts are that you are outsourcing this to so we can see if these experts are being politically motivated.

Rep. French Hill (R-AR-2): The Task Force (TCFD, Bloomberg Chairman) admits that reliable estimates on greenhouse gas emissions under Scope 3 would be difficult; calling them “problematic” and “costly” and saying they would “magnify the cost of assessing climate impacts”. Finally, “it would be difficult to determine impacts with precision.” That is what the Bloomberg Task Force said. So how can the SEC have (greenhouse gas emissions risk) in its rulemaking? How, as an enforcement officer, can you take it into court?

Grewal: I haven’t read the TCFD report.

Rep. Hill: Well, you should. And read the proposed rulemaking if that is so important in order to save the planet. Can you enforce something that is that vague, not timely, and not agreed upon by the accounting profession, and very hard to make a case on it, yes or no?

Grewal: I haven’t read that report.

A group of 24 Democrats led by Rep. Mike Levin (D-CA-49) wrote to the SEC in support of the rulemaking, citing climate risk of third-party vendors, in this case – cattle ranchers.

You can see their letter here.

On March 18, seven of the 10 Republicans on the House Financial Services Subcommittee on Investor Protection and Capital Markets wrote against the rulemaking. The letter, led by Subcommittee Ranking Member Bill Huizenga (R-MI-2), said the SEC should “freeze its work on this” proposal.

You can see their letter here.

It was clear the Democrats, even in farm districts and states, were viewing this through the lens of protecting the environment and uniformly defining ESG for lenders and investors. At the same time, Republicans were more concerned about the impact on domestic production.

ESG Will Lead to More Imports

More than 100 agriculture groups have asked the SEC for more time to review the rule. In a letter to SEC Secretary Vanessa Countryman, the coalition of farmers said the rule’s Scope 3 greenhouse gas emissions may create multiple new sources of substantial costs and liabilities for their members.

Cost is what usually drives production away from the U.S. and leads to greater import penetration. As one of the world’s biggest food producers, reliance on global corporations with little allegiance to home countries and new, high-tech, cultured meats would be a major headwind for American farmers. Worth noting, China made the “new foods” market part of its Five Year Plan this year.

Europe is worried. It may be too entrenched there to roll back.

“What this does is it tells ADM and Bunge how to purchase food and then the corporations will push that down to the cattle producers,” said Bill Bullard, CEO of R-CALF USA in Montana.

“They are gathering that information now, so what you have here is the first phase of government and/or corporate control of farmers and ranchers. And because there are so few companies you are selling to, these companies can limit what they buy and how they buy it. There is no rule now. But if there is a rule, the American rancher will be subject to what the packers say they need to do in order to be in compliance,” Bullard said.

R-CALF issued a statement in support of the Dutch farmers on July 21, saying U.S. ranchers were “on the cusp of suffering the same fate.” Three days later, the Trudeau government in Canada said it wanted a 30% reduction in fertilizer use.

It’s getting closer.

“What the SEC is trying to do now is allow the banks to blackmail publicly traded companies into this ESG framework and now they are going to require it by regulation at the SEC,” said Tracy Hunt, a rancher in Wyoming. “For me, that means (Brazilian owned meat packer) JBS will be able to say, ‘hey boys, it’s not us making the rules. You have to do this for us or we can’t buy your beef because I wouldn’t be compliant’,” Hunt said.

“We already have some of the most stringent environmental rules in the world,” said CEO of Atlas Tool outside of Chicago, and Chairman of the Coalition for a Prosperous America, a DC think tank advocating primarily for American manufacturing and domestic production. “Multiple indicators show that our environmental policies are working. America’s waterways, land and air have improved significantly since the 70’s and keep improving. This SEC proposal is nothing but hand waving and virtue signaling, and if implemented, it will only move production to the dirtiest places on earth where no one is looking.”

Comments to the SEC

Here are some examples of the letters to the SEC written by both sides of the debate.

Investors in the “new foods” market favored the rule. They want to punish ranchers the most via Scope 3 because it makes a market for them, and they got into that market as early investors. “Disclosure requirements that do not include Scope 3 emissions…do not reflect the true magnitude of this industry’s climate exposures,” wrote Curt Albright of Clear Current Capital.

Clear Current are investors in synthetic (or cultured) food start-ups in the U.S. and Europe. They are also big on plant proteins, as if plants do not require fertilizer.

BlackRock supports the rule. They said in a letter dated June 11, 2021 that while Scope 3 might be difficult at first, as the Bloomberg Task Force suggested, a phase in approach is needed with full implementation “as soon as practical.” Would BlackRock support similar measures on food grown in Brazil? If so, Brazil’s government would ignore them and find investors elsewhere.

Over 16 Attorney Generals wrote against the proposal, saying “requiring mandating detailed emissions metrics is not necessary from a market-protection standpoint based on current disclosure practices in mandatory filings, and that the market is already responding in other forums – voluntarily – to investors’ interest in these topics.”

Patrick Morrissey, Attorney General of West Virginia signed onto that letter and wrote his own on March 15, 2021, giving examples of previous investor groups claiming to need publicly traded companies to disclose issues related to “the food crisis”, “energy conservation” and “racial justice” as far back as 1975.

“The Commission should stick to its core mission of requiring statements on matters that are material to future financial performance – not statements on issues that drive a political agenda. Fundamentally changing the SEC’s mission would allow it to compel collection and disclosure of information to help some customers and investors advance prejudice and animus towards groups and activities they disfavor,” Morrissey wrote.

“Most public companies view the Climate Disclosure rule as the biggest change in public company reporting since Sarbanes-Oxley internal control requirements. As with the implementation of any groundbreaking rule, companies will be forced to spend a material amount of money hiring consultants (generally from the big 4 accounting firms) to roll out a sound framework. Alternatively, companies can spend material amounts of money hiring an in-house team, but in both events, shareholders will feel the pressure on earnings related to the rollout of this rule. By imposing a rule this drastic, with a limited time to prepare, companies have no choice but to hire professionals who charge fees with limited options in a brand new space.” — Anonymous CFO of a publicly traded company.

Everyone can agree that fewer pollutants and greenhouse gases are a goal worth achieving. Some U.S. industries could benefit from being super green, though that’s not the rule.

U.S. solar is cleaner and greener than Chinese solar. Still, the U.S. industry is not favored in any way to Chinese solar, which has allegedly relied on prison labor in Xinjiang for the polysilicon used in making solar cells.

American steel is cleaner than Asian steel because it relies on recycled inputs, but barring Section 232 trade tariffs, the sector lost out to imports.

In times of supply chain uncertainties, where rumors of a food crisis abound, punishing American farmers the way the Dutch and Canadians intend to do to reduce emissions locally is meaningless when food producers elsewhere do not, and will not, face similar restrictions. This policy is a green light to more significant food imports in the U.S., to the detriment of the U.S. farmer and food security.

For those thinking the “net zero” cultured meat market will take over one day, American policymakers should be mindful of China investing heavily there thanks to the West touting this new food market. China did the same with other sectors, namely solar, which it now dominates. They took their cue from the West’s concern over going green in its energy matrix and built the world’s most-used solar supply chain. Wind turbines are the next post-fossil fuels manufacturing sector to be taken over by China. Worth noting, The Netherlands is also promoting this patented, cultured meat space, including partnering with China.

“It seems like the SEC is seeking to drive the production of nearly everything out of America. Maybe they should change their name because ‘Security’ is exactly the opposite of what we will have when we get rid of all these things,” Mottl said. “The environment will not be better off. We need agriculture, ranching, farming, mining, and manufacturing. As it stands today, without any new rules, America is the preeminent place – the cleanest place in terms of environment and the safest place for workers – to raise livestock, to raise crops, to mine minerals, and to manufacture things.”