New Climate Disclosure Rule Coming Soon from SEC

The Securities and Exchange Commission (SEC) will soon release a new proposed rule that will likely require climate change disclosures by public companies. Douglas MacMillan and Maxine Joselow write in The Washington Post:

Under a groundbreaking new rule the SEC is expected to propose Monday, hundreds of businesses would be required to measure and disclose greenhouse gas emissions in a standardized way for the first time, according to two people briefed on the agency’s discussions who spoke on the condition of anonymity to describe internal deliberations. The move could mark the most sweeping overhaul of corporate disclosure rules in more than a decade, and could put the United States on closer footing with other countries set to begin mandated emissions reporting over the next three years.

While the looming disclosure mandate certainly will have its supporters, law professor (and CEI alum) Jonathan Adler made an important point at the end of last week at Reason about how courts are currently viewing federal climate policy:

The timing of the SEC’s decision is interesting because the Supreme Court’s pending decision in West Virginia v. EPA could well affect the SEC’s authority to mandate broader climate disclosures and increase the litigation risk to any new disclosure requirement. Should the Supreme Court conclude that Section 111 of the Clean Air Act can only be read to authorize traditional pollution control measures on specific facilities, as opposed to broader system-wide changes within the power sector, parallel arguments could be made against the SEC’s authority under existing law to mandate broader climate or other environmental disclosures. If the former shift in regulatory authority is the sort of “major question” that requires legislative approval, it would seem the latter is too.

Adler is not the only one sizing up potential legal challenges. Last August—at a time when SEC watchers thought the new proposed rule would be released as early as October 2021—two attorneys with Winston & Strawn laid out several potential strategies for challenging the expected provisions, including constitutional, statutory, and procedural claims:

Policy groups, like the Competitive Enterprise Institute, claim that the call for mandatory climate risk disclosures is “climate change activism in a finance regulation wrapper, rather than a serious effort to foster better price discovery or remedy any real damage to investors.”

They argue that the First Amendment’s compelled-speech doctrine means that the government cannot force an individual, group, or corporation to express specific beliefs.

The First Amendment not only prevents the government from punishing a person for his or her speech; it also prevents the government from punishing a person for refusing to speak in a certain way.

One of the most frequently heard arguments for the government requiring greater climate disclosure is that investors are demanding this information and therefore it should be the SEC’s responsibility to deliver it to them. The Cato Institute’s Jennifer Schulp took a look at this question last July:

[E]ven if we understood who the investors are, there is little clarity on what they are “demanding.” While investors shouldn’t be expected to be able to articulate their disclosure needs with precision, there is little consensus about what information should be subject to mandatory disclosure. Studies in this space often ask questions about “ESG” generally—an exceedingly vague categorization—and their results offer little in terms of what information may be useful to investors. A Schroders report notes that “[k]eeping details, definitions and methodologies vague [has] allowed investors to infer their own expectations of what constitutes sustainability.” This vagueness has resulted in an eclectic mix of strategies and products being described as “sustainable,” and it complicates attempts to determine what information may be of interest to investors.

Before we even consider investor demand, however, we should probably ponder whether the SEC has the statutory authority to require climate change disclosure in the first place. The August 2021 policy brief by the Mercatus Center’s Andrew Vollmer comes to a stark conclusion:

The SEC’s disclosure rulemaking power is limited. Congress must act to expand public and issuing company disclosures beyond the fundamental areas covered in the Securities Act and the Securities Exchange Act before the SEC may promulgate implementing regulations. SEC adoption of climate-related disclosure rules in the absence of explicit enabling legislation would exceed the limitations on the rulemaking powers that the agency has itself recognized.