Proposal on Climate-Related Disclosures Falls Within the SEC’s Authority

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is based on his recent comment letter. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock by Lucian A. Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition by Mark J. Roe (discussed on the Forum here).

I write to comment on legal authority. The proposal is well within the Commission’s authority to adopt. Critiques on legal grounds fall far short of what would be needed for a court to overturn the rule.

Congress, having made a fundamental policy judgment to require “full and fair” disclosure to protect investors, directed the Commission to make ongoing subsidiary choices of precisely what details of disclosure to require and when, after engaging in fact-finding and analysis that Congress chose not to try to do itself.

Here, the proposal frames difficult, subsidiary choices, which divide reasonable observers. Those choices I do not here address. They require fact-finding and expert factual judgments about likely effects, costs, benefits and risks of alternatives, including inaction, in the face of investor needs that have led most large companies to publish inconsistent and variable climate-related disclosures. The Constitution, and Congress, have given the Commission—and not the courts—authority to make those judgments.

Throughout I describe rather than argue for what the law should be. Many legal issues are open to reasonable debate. However, many legal questions have clear answers. The proposed rule specifies the details of disclosure, just as Congress directed the Commission to do. It does not regulate climate activity itself (e.g., greenhouse gas emissions) and would have modest effects on the economy as a whole. It is authorized by clear statutes, is consistent with settled understandings, and addresses disclosure topics covered by rules adopted long ago by the Commission and ratified by Congress. It is not a “transformative” surprising regulatory departure, raising such a “major question” as to justify interpretive methods other than those of a faithful agent of Congress.

Nor has the “major questions doctrine” ever been used to overturn authority unambiguously granted by the plain text of a statute. “Clear statement” canons play no role when statutes speak clearly. Striking down regulations adopted pursuant to clear and limited delegated authority would turn the doctrine’s purpose against itself, prevent Congress from assigning traditional fact-finding and implementation roles to agencies, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers.

Overturning this rule as unauthorized on that basis would wipe out most of the Commission’s disclosure rulebook. Nothing at stake in this proposed rule justifies such judicial lawmaking.

Introduction and overview

The case for the Commission’s authority to adopt the proposed rule is a simple, two-premise syllogism:

  1. Congress created and in plain words authorized the Commission to protect investors by specifying public company disclosures of information about financial risks and
  2. The rule proposes disclosures of information about financial risks and opportunities that are reasonably understood as appropriate for the protection of investors.

Hence the rule is authorized. As discussed in Point I, critics of the rule cannot plausibly attack premise one. The Commission’s authority is plain in its organic statutes, legislative history, in long-standing precedent, in both court decisions and its own rules, and repeatedly accepted by Congress through amendments of the statutory bases for those rules. The Commission’s authority to consider environmental risks was reinforced and made even more clear by another statute, which critics do not seem to have even noted, much less considered, as detailed below.

So, instead, like a cuckoo putting its eggs into another’s nest, critics have resorted to mischaracterizing the proposal, and inventing their own, fictional rule—not actually proposed—to attack premise two, and claim the Commission lacks authority for their fictional new rule. For example, they point to the broader “ESG” movement and claim the fictional new rule requires disclosure about ESG, or about environmental impacts not relevant to investors. They argue that because the fictional new rule requires disclosure of environmental impact, the Commission’s authority was silently removed when Congress authorized the Environmental Protection Agency (EPA) to address that impact. They argue that the disclosures required by the fictional new rule would be opinions, not facts, so it would violate the First Amendment. Because (they claim) the fictional new rule reflects climate change policy, and because climate change is new and important, the plain text of the Commission’s statutory authority cannot really mean what it says. Or they argue without evidence about secret motivations, socialist agendas, and “political” goals to cripple industries and to reduce our nation’s energy security.

As discussed in Point II, each attack is mistaken and misleading because the proposed rule is not the critics’ fictional new rule. Read fairly and dispassionately—non-politically, one might say—disclosures specified by the rule are not about environmental impact, or climate change, but about financial risks and opportunities related to climate change. Indeed, the actual proposed rule requires disclosure about subject matters long covered by indisputably authorized disclosure requirements—the first point made by Commissioner Peirce in her dissent. What is proposed is to not to add new subject matters to public company disclosures, but to refine the mode and detail of already-required disclosures.

The focus of the actual rule is the impact of climate change on companies, and not vice versa. The actual rule’s “fit” with the goals of environmental activists is poor, and its “fit” with the goals of investor advocates is tight. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. Because, finally, the disclosures are financial and do not extend to the large part of the economy owned by private companies, they would not constitute general climate change policy, such as a carbon tax or emissions cap-and-trade scheme. Those important topics remain for Congress, and the proposal on its own does not raise new “major questions” warranting a deviation from standard statutory interpretation. As to motivations, the long and extensive record leading to the proposal of the rule can be reviewed in its entirety and nowhere will any evidence be found that the purpose of the rule is other than to protect investors.

In sum, each attack succeeds only as applied to a fictional new rule. The Commission’s authority to adopt the actual proposed rule remains intact, and clear. The rest of this post details Points I and II.

I. The Commission’s undisputed authorities

The legal authorities cited by the Commission in the proposing release are the conventional authorities for disclosure rules over nearly a century. Those authorities are general in nature, not limited to specific topics. In plain unambiguous text, they encompass financial risks and opportunities related to any source.

A. Unambiguous disclosure authority to protect investors under the 1933 Act

Specifically, Section 7 gives the Commission unambiguous authority to specify the contents of disclosure documents used to register securities for sale to the public. In that section, companies are required to disclose a specified list of financial disclosure and documents set out in Schedule A, to obtain consents from “any accountant, engineer, or appraiser” or other professional identified in the disclosures, and—in a separate sentence—to disclose “such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate … for the protection of investors.”

Three points about this text are worth emphasizing.

First, the 1933 Act itself required disclosure not only of specified financial items, but also qualitative, open-ended information, such as the “general character” of the company’s business, compensation, and material contracts, and reinforced its breadth by referring not only to opinions of “accountants” and “appraisers” but also “engineers” and other professionals, such as lawyers or—as under the present proposal—experts on greenhouse gas accounting. If useful for “the protection of investors,” disclosure was not limited to the four corners of, or even commentary on, financial statements.

Second, the 1933 Act makes clear that Congress expected and directed the Commission to go beyond content specified in the Act, and granted authority to go beyond what is “necessary” to include what the Commission concludes is “appropriate” for the protection of investors. Congress expected the Commission to use expert judgment to update disclosure over time, as new or newly identified risks emerge.

Third, the 1933 Act includes a specific limit to this authority, that it be “for the protection of investors”—but no further qualifier. The 1933 Act does not limit additional disclosures to those that are “related” or “similar” to the items in Schedule A, or “material,” or “financial,” despite the fact that Congress frequently used those very qualifiers elsewhere in the statute. The Commission has commonly limited requirements to “material” and “related” items, but that is not because of a legal limit on its authority, but as a subsidiary choice of how to implement Congress’s policy judgment to require full and fair disclosure, based on its experience and expertise.

The context of this authorizing language reinforces these conclusions. For example, the famous phrase “full and fair disclosure” is in the full title to the 1933 Act, and so part of its statutory meaning. The caption to Section 7—“Information required in registration statement”—contains no qualifiers on “information.” The authorizing language in Section 7(a)(1) is limited by Section 7(a)(2), but only for a designated class of “emerging growth companies,” and not as to content. The limitations in 7(a)(2) were imposed in 2012, by which time (as detailed below and in Annex A), the Commission had repeatedly relied upon the language in Section 7(a)(1) to require disclosures of all kinds, including non-financial disclosures, environmental disclosures and climate-change related disclosures. Congress in 2012 thus ratified long-standing Commission exercises of the unambiguous authority in 7(a)(1).

In sum, the text and context of the 1933 Act itself gives the Commission broad authority to require disclosures about financial risks and opportunities beyond the inevitably incomplete initial lists of information and documents included in the statute. As discussed in Point II, the proposed rule requires disclosures about financial risks and opportunities, so even if there were an explicit limit on the Commission’s authority that disclosures under Section 7 be “financial” in nature, or “related” to the financial statements, or to the elements in the statute, the proposed rule would still be authorized. Regardless, as long as the disclosures are fairly designed “for the protection of investors,” a factual assessment of the kind commonly delegated by Congress to regulatory agencies, they would fall within the clear limiting principle of that law. Imposing further limiting principles may for some “be appealing from a policy standpoint,” but doing so has “no basis whatsoever in the statute’s text.”

B. Legislative history and contemporaneous commentary confirm this authority

Although some are reluctant to consider legislative history or expert contemporaneous commentary in interpreting statutes, it is useful to do so briefly here for a simple reason. To the extent that those who disfavor consideration of legislative history truly give primacy to legislative text and structure, there is no plausible basis on which to argue the Commission lacks authority to adopt the proposed rule. The plain language could not be clearer in directing the Commission to do what it is proposing to do: specify the details of disclosure appropriate to protect investors, based on its fact-finding and expert judgment. But as some critics do ignore the plain language of the statute, it should be emphasized that they find no more support for the notion that the Commission lacks authority in the legislative history, or in generations of legislative, executive, and judicial understanding of the statute’s meaning.

All those sources here align with the 1933 Act’s plain, ordinary meaning, and so confirm the above conclusions. A draft of what would become the 1933 Act in the Senate included disclosure items directly in the statute, and did not contain the equivalent language later adopted in Section 7, which directs the Commission to go beyond that list (which is separate from the Commission’s general rulemaking authority in Section 19). This demonstrates that the broader direction was consciously added during the legislative process. In contrast, proposals to give the Commission discretion to approve or disapprove of the “soundness” of stock offerings was rejected by Congress—the 1933 Act in the end embraced full and fair disclosure as the method to protect investors.

This legislative choice—disclosure, but not “merit review”—is an important and real “intelligible principle” limiting the Commission’s general authority, along with the specific, and limited purpose for those disclosures, that they be those “appropriate” for the “protection of investors.” These limits explain why further restrictions on the Commission’s authority to specify disclosures to protect investors were not needed to constitutionally cabin Congress’s delegation to the Commission under the 1933 Act.

At hearings on what became the 1933 Act, the Senate heard testimony advocating longer or shorter periods of time for financial statements, specific proposals for additions to or eliminations from the list of disclosure items, arguments about whether audits should be done by reference to industry peers, and how expensive audits would be. The resulting awareness of the need for detailed specification of disclosures led to the delegation reflected in the 1933 Act. During the hearings, it was explicitly noted by a former FTC Commissioner and an advisor to President Roosevelt that:

We are trying not to have this bill be too long. I think it is only about 30 pages, while the British Companies Act is over 300 pages. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. In those rules and regulations we expected them, in drafting their forms, to go more into detail with regard to requirements.

In other words, the delegation to the Commission was deliberate, was specifically intended to apply to required disclosures, and was sensible, reflecting an anticipation that the Congress itself could not reasonably work out in detail the kinds of choices necessary to develop and keep up to date an appropriate disclosure regime.

An extended comment on the 1933 Act published in the Michigan Law Review in March 1934 echoes these points, summarizing the law as having two purposes:

(1) that there shall be filed with the Federal Trade Commission a full, accurate and complete statement of all pertinent facts concerning issues of the securities and (2) that instruments of transportation or communication in interstate commerce and the mails shall not be used directly or indirectly to effectuate fraudulent sales.

In other words, public companies’ disclosures were expected to go beyond basic financial statements. Because the items listed in the statutes themselves could not reasonably be understood to cover “all pertinent facts,” the final language in the statute also reflected an expectation that Commission regulations would be needed to augment the statute itself. The commentary distinguishes between the full disclosure purpose of the 1933 Act from its separate, anti-fraud purpose. The law went beyond combating affirmative fraud, where intent, materiality, and damages had a role to play, and added to it a general philosophy of “seller beware,” in which “all pertinent facts” must be disclosed before a company sells stock, and liability could attach even without traditional hallmarks of fraud, albeit with separate limiting conditions.

As stressed by Justice Alito, when he was a Judge on the Third Circuit:

Because the materiality standards for Rule 10b-5 [the Commission’s primary anti-fraud rule] and SK-303 [an affirmative disclosure requirement for “known trends and uncertainties,” among other things] differ significantly, the ‘demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b-5.’”

In short, disclosure authority extends beyond what would constitute fraud at common law, and has long been used by the Commission to specify disclosure of what would not necessarily be “material” for that purpose.

C. The Commission’s unambiguous disclosure authorities under the 1934 Act

But the Commission’s authorities go further, precisely because Congress recognized that investors need information beyond the moment of initial offer and sale, which are addressed by the 1933 Act. One of the primary purposes of the 1934 Act was to augment the 1933 Act by giving the Commission authority to require ongoing reports by companies whose securities were traded on stock exchanges. Section 12 of the 1934 Act conditions exchange-trading privileges unless securities are registered by companies disclosing “such information, in such detail, as to the [company] … as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following: … the organization, financial structure, and nature of the business.”

Section 13(a)(2) of the 1934 Act goes further still, and requires companies to disclose, under rules the Commission:

may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security … such annual reports … and such quarterly reports … as the Commission may prescribe.

Again, this language is not limited to what is “necessary” to protect investors, but gives the Commission discretion to specify what information is “appropriate” to protect investors and markets, based on its fact-finding and expert application of the statute’s goals to evolving investor needs. As with the 1933 Act, this statutory language authorizes periodic reports and imposes no subject-matter restriction on those reports. It does not say, for example, “annual financial reports,” but simply “annual reports.” As with the 1933 Act, the authority is not unbounded—it is limited by the phrase “appropriate for the proper protection of investors,” with the gloss that the rules also be appropriate “to insure fair dealing in the security,” a reflection of the fact that the 1934 Act was designed to govern securities that were already trading on securities markets.

D. Legislative history on authority under the 1934 Act

Authority for disclosure under the 1934 Act addressed more than the need for protection of the initial investor acquiring securities. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. As the House Report accompanying the 1934 Act explained:

The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price. Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real value…The disclosure of information materially important to investors may not instantaneously be reflected in market value, but despite the intricacies of securities values truth does find relatively quick acceptance on the market.

One need not be a strong believer in the efficient market hypothesis to believe that disclosure often aligns market prices with investment risk and returns, albeit sometimes with delays and errors, which makes ongoing refinements in disclosure requirements all the more important to healthy markets.

Congress also recognized that full and fair disclosure would enhance investor confidence. Without such confidence, Congress astutely observed:

Easy liquidity of the resources in which wealth is invested is a danger rather than a prop to the stability of [the market] system. When everything everyone owns can be sold at once, there must be confidence not to sell.

These understandings help explain Congress’s decision to direct the Commission to specify additional disclosures under the 1934 Act, to adapt the statute to emerging financial risks and opportunities and maintain efficient capital market pricing and investor confidence over time.

E. The Commission’s continuous exercises of authority and Congressional acceptance thereof

Over time, the Commission has used its authorities under the 1933 Act and the 1934 Act to specify the details of required disclosures about a range of matters, both in and outside corporate financial statements, as illustrated in detail in Annex A to this post. Often these requirements have been specific and prescriptive in nature. They have been adopted under Chairs appointed by both Democratic and Republican Presidents, in every decade since 1933. Many contain materiality qualifiers, but many do not.

Annex A contains just a sampling—many more additions and refinements have been adopted in the decades since 1933. Few of the requirements in Annex A directly involved current or even near-term financial cash flows of the kind required to be reflected in financial statements, such as reserves for contingent liabilities or non-cash commitments to invest in the future. To be clear, the Commission has also routinely added required disclosures that do affect the financial statements, too.

And to be yet more clear, the Commission has not simply expanded or added to required disclosures over time—it has cut, compressed, and consolidated as well, in step with the needs of investors over time. The result is a continuously adjusted, detailed system of disclosure specifications, reflecting the Commission’s fact-finding and expertise. In sum, throughout its history, and consistently, the Commission has fulfilled its statutory mandate to specify required disclosure of information that was not directly financial in nature, but posed risks about a future financial impacts, often indirect, contingent or both.

Some claim the Commission has acknowledged or adopted limits on its disclosure authorities, beyond limits in the text of the statutes. They point to a footnote in a 2016 Concept release to support this claim. Aside from the elementary fact that the Commission has no authority to edit Congressionally adopted statutes, the concept release actually says precisely the opposite. Citing to a 1975 release, the Commission in 2016 noted, non-controversially, that “In [the 1975] release, the Commission concluded that, although it is generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws, it is authorized and required by NEPA [the National Environmental Policy Act] to consider promotion of environmental protection as a factor in exercising its rulemaking authority.” This statement denies authority only if disclosure is “unrelated to” investor protection, protection of market integrity, or the public interest more generally. It does not suggest any limit other than what is in the statutes themselves, including NEPA.

As detailed in Annex B to this post, not only has the Commission repeatedly specified more than the minima in the 1933 Act itself, it has repeatedly had its augmented disclosure rules acknowledged, accepted and ratified by Congress, through multiple amendments to its organic statutes. Congress both expanded authorities and limited which and how specific types of companies and transactions are covered by its disclosure regime. It also cut back on liability of disclosure. But Congress has never cut back on the Commission’s general obligation to specify the contents of its disclosure regime, such as by editing or reversing prior disclosure specifications. As noted above, the JOBS Act, for example, limited the full requirements in Section 7 for “emerging growth companies,” but left the Commission’s overall authority to require disclosure for other public companies intact. Congressional ratification has been repeated and affirmative—not mere inaction. Congress repeatedly amended and expanded the Commission’s disclosure regime, including by adding to the authorities relied upon for the present proposed rule.

Congressional support for the Commission’s clear (but statutorily limited) disclosure authority is shown by the fact that over time, in the face of repeated Congressional amendments and annual budget laws (in which Congress can and has inserted “riders” further limiting Commission discretion), the Commission’s requirements ranged far beyond the limited lists of information in the 1933 and 1934 Acts themselves. The requirements and have specifically included disclosures related to the environment. The requirements have included disclosures about risks and uncertainties generally, and of information both qualitative (business segments; competitive conditions; management, environmental and other litigation; and contracts) and quantitative (mineral reserve estimates, loan performance statistics, coverage ratios, material transactions, and compensation). The brief historical review in Annexes A and B (and much more detail could be added) shows that nothing about the current proposed rule’s contents (discussed more below) should be legally surprising in any meaningful way, to Congress or to companies or their investors.

F. Judicial assessments of the Commission’s disclosure authorities

No court has ever found that this long line of exercises of the basic authorities on which the current rule relies were beyond the Commission’s authority. Indeed, the texts are so clear that—in contrast to the many times the Commission has been challenged on anti-fraud rulemakings, where authority has been interpreted as limited by common law anti-fraud principles—few attempts have been made to challenge the Commission’s use of its basic disclosure authorities to require disclosure. Instead, as summarized by the D.C. Circuit Court of Appeals in 1979:

the Commission has been vested by Congress with broad discretionary powers to promulgate (or not to promulgate) rules requiring disclosure of information beyond that specifically required by statute. Rather than casting disclosure rules in stone, Congress opted to rely on the discretion and expertise of the SEC for a determination of what types of additional disclosure would be desirable.

The Commission’s authority, to reiterate, includes discretion to promulgate rules governing corporate disclosure. This discretion continues to be sensible, in light of the fact that:

The Commission’s task [is] a peculiarly difficult one, requiring it to find a path between the views of the parties to the rulemaking polarized in support of the broadest disclosure or in opposition to any disclosure, to interpret novel statutory commands, and to make decisions against the background of rapidly changing conditions ….

Recognition of the need for exercises of delegated disclosure authority can be found in other court decisions. The U.S. Supreme Court has repeatedly and recently emphasized that “the fundamental purpose of the 1934 Act [was] ‘to substitute a philosophy of full disclosure for the philosophy of caveat emptor’ . . ..” The Court has stressed the structure and design of the 1933 and 1934 Acts reflect an understood need for regulatory flexibility, even in decisions limiting the reach of Commission rules where the precise limits of its authority are less clear, such as Rule 10b-5: “Congress recognized that efficient regulation of securities trading could not be accomplished under a rigid statutory program.” In numerous cases, the Court and lower courts have held that the federal securities laws are to be construed broadly, “not technically and restrictively, but flexibly to effectuate its remedial purposes.”

Some claim that the statutory limits on the Commission’s disclosure authority have no real meaning—because one can pretend that anything is “for protection of investors,” no real limiting principle exists in the 1933 and 1934 Acts on the Commission’s authority, so either it impermissibly delegates or further limits need to be invented to make the statutes constitutional. As noted above, this claim is wrong because the securities laws already limit the Commission’s power in two ways, to the use of disclosure (versus merits review) as a regulatory tool, and to the use disclosure “for the protection of investors.” These claims are further belied by a string of decisions in which courts have rejected attempts by the Commission to rely on disclosure and anti-fraud authority to engage in substantive regulation of corporate transactions or corporate mismanagement. These decisions show that the Commission’s delegated power is limited, and that the statutory limits (protection of investors and markets) are intelligible and have bite. These decisions underscore the need for the Commission to have broad rulemaking authority to protect investors on the disclosure side of the “firebreak” between federal securities law and state corporate law.

That there are limits on the limits is also clear from prior decisions. Courts have rejected attempts to deny application of the securities laws and the philosophy of “full disclosure” in cases involving the sale of a whole company, if effected through the sale of securities, or where conduct may violate both corporate law and the Commission’s disclosure laws. These cases also show that “protection of investors” includes disclosure not only about securities, but also companies that issue them, and risks to investors their activities create. No case is the contrary, and critics of the Commission’s proposed rule cite none.

G. Congress explicitly added environmental protection to the SEC’s disclosure mandate

As noted above, subsequent to the initial passage of the securities laws, but after the passage of the initial Clean Air Act and in the same year EPA was created (1970), Congress directed the Commission (along with all other agencies of the federal government) to consider environmental protection in its rulemakings. In the National Environmental Policy Act (NEPA), Congress “made environmental considerations part of the SEC’s substantive mission.” That statute—still on the books—provides (among other things):

The Congress recognizes that each person should enjoy a healthful environment and that each person has a responsibility to contribute to the preservation and enhancement of the environment. … The Congress authorizes and directs that, to the fullest extent possible: (1) the policies, regulations, and public laws of the United States shall be interpreted and administered in accordance with the policies set forth in this chapter, and (2) all agencies of the Federal Government shall—… make available to States, counties, municipalities, institutions, and individuals, advice and information useful in restoring, maintaining, and enhancing the quality of the environment

Although the D.C. Circuit concluded in 1979 that based on the record before it at that time, the Commission was not required to adopt environmental disclosure obligations beyond what it had already adopted, the Court also concluded that it was authorized to and could do so, if the Commission itself came to an expert judgment that doing so was in service of its statutory missions of protecting investors and promoting the public interest. The D.C. Circuit’s decision, moreover, was premised in part on a representation by the Commission that the Commission would “continue to reevaluate the need for such [new disclosure] requirements from time to time.” The climate disclosure rule now proposed by the Commission is precisely in keeping with that long-standing commitment by the Commission.

II. Clarity on what the rule would and would not do, and responses to claims the proposal is unauthorized

Despite this clear authority, critics argue the Commission lacks authority to move forward with the proposal. To make their case, they distort the proposed rule beyond any fair reading, into a new, fictional rule that addresses environmental concerns rather than investor concerns. In truth, as this Point will detail, the actual proposed rule best “fits” with what investors need and want, and not what climate activists seeking to reduce climate impacts of business would seek, or even a rule they might write to elicit reporting about those impacts. The proposal is both narrower and broader than the critics’ fictional rule because it calls for and is limited to investor-focused information from public companies—traditional and long-standing hallmarks of U.S. securities laws and regulations. It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. It is also not a rule the EPA or any other regulatory agency has adopted or could legally adopt. It is not a rule requiring or limiting opinions or “controversial” speech, and raises no First Amendment concerns. Because it is an investor-focused disclosure rule, and in no plausible way advances a general policy on climate, it raises no new “major question” of that kind, that might theoretically justify a departure from standard methods of statutory interpretation.

1. The rule is a disclosure rule, in keeping with the Commission’s expertise

The proposed rule is a rule that specifies details of disclosure requirements. It does not embody a general policy to address climate change, or engage the range of social and economic issues that climate change raises. If the American people, through their representatives, wish to remediate climate change, or fulfill climate-related treaty obligations, this rule will not do those jobs. Other agencies will need to tackle the many tasks those greater ambitions involve. For example:

  • The proposed rule does not itself restrict or limit environmentally harmful activity.
  • It does not cap emissions, an approach that would be typical of environmental regulation generally.
  • It does not impose a carbon tax or create a “cap-and-trade” regime.
  • It does not address how to measure or use the “social cost of carbon,” as is done by other agencies.
  • It would not itself force any company to shut down greenhouse-gas-emitting factories.

Instead, the proposed rule would increase the climate-related information provided by public companies to investors. That information may play a role in affecting the kinds of opportunities and risks that public companies can pursue with other people’s (investors’) money, and how investors price those opportunities and risks, and use whatever governance or liquidity rights they have to respond to corporate behavior. But companies will not be limited by the rule itself in how they and their investors respond to climate change.

Because the rule is an investor-oriented disclosure rule, it is within the Commission’s expertise. It is true that the subject matter of the financial risks and opportunities raised by climate change are complex, and climate experts have specialized knowledge about climate science. But to develop and apply a disclosure rule of the kind proposed here does not require the same level of climate expertise as held by EPA (or, for climate change’s impact on weather, the National Oceanic and Atmospheric Administration), and those agencies lack the expertise in finance, accounting and investment that is also necessary for any investor-oriented disclosure rule that addresses climate-related financial risk.

The Commission’s proposed rule relies upon a traditional role for regulatory agencies—to find facts and use the facts so found to implement Congress’s direction to require disclosures for a stated purpose—the protection of investors. Specifically, the Commission relied upon wide-ranging and deep engagement over more than a year, gathering input from public comments, in public discussions, and meetings with and through letters from companies, investors, trade groups, climate specialists, EPA and other experts regarding corporate environmental and climate reporting, to craft its proposed rule, just as it has done in other areas.

The fact-finding for this rule, and the financial and accounting expertise on which it is based, is in keeping with the long tradition in which the Commission and its staff have applied expert knowledge about general risk/return, accrual and related concepts to an array of different source of risk and potential liability. These include (for example) asbestos and other sources of tort liability, contract and other kinds of commercial litigation, and cybersecurity and other kinds of technology risks. Executive compensation is its own, complex and specialized area of management and finance, leading companies to hire expert advisors to develop compensation plans. The fact that those areas are themselves specialized, with their own experts with far more knowledge than exists at the Commission, does not mean the Commission cannot adequately apply its disclosure regime to those risks. In part, that is because of one of the key limits on the Commission’s authority—it is delegated the job of specifying information for disclosure, not the job of “merits review,” which would require it to have far more substantive expertise in those specialized areas.

Numerous other disclosure requirements adopted by the Commission over the years are similar in applying to specialized areas of expertise primarily existing outside the agency.

  • Credit quality of loan portfolios requires expertise to understand in detail, which is typically found in bank regulatory agencies. Yet the Commission nonetheless has long protected investors in bank holding companies by requiring detailed disclosure beyond the financial statement for such companies, as noted in Annex A.
  • So, too, for mining companies, asset-backed issuers, and other sectors, as also detailed in Annex A. Aircraft manufacturers essentially have their own specialized “program” accounting, due to the unusually long and complex capital investment process they follow.
  • Most companies now include—and sometimes are required to include– industry- or firm-specific key performance indicators in their Commission filings, which require industry- or firm-specialized knowledge to understand and evaluate.
  • Companies in the defense industry report in their Commission-required filings using technical, specialized industry jargon on government procurement, budgets, military strategy, products and market dynamics about which staff at the Department of Defense have far more detailed knowledge than the Commission.

Yet no one has ever successfully argued that the Commission should not develop, adapt or apply disclosure rules to banks, mining companies, asset-backed issuers, airlines or defense contractors, despite the specialized knowledge that a full understanding of those companies would require, and despite the fact that the Commission does not have full-time staff who are themselves experts of the same kind that other regulators may have, or which companies hire to provide them with advice about such topics.

2. The proposed disclosures refine the mode of disclosure, but do not add topics not covered by prior, long-standing, and Congressionally blessed disclosures requirements

As stressed by Commissioner Peirce in her dissenting statement, the proposed disclosures called for by the rule are in line with prior Commission-required disclosures, as detailed in Annex A. “Existing rules already cover material climate risks” is the first point she makes. And she is right: environmental compliance costs and risks from non-compliance have been required by the basic business description line item in Regulation S-K, which ultimately traces back to Schedule A in the 1933 Act itself, and MD&A and risk factor requirements that would encompass known climate-related risks and “uncertainties” were first adopted in 1968. As the proposing release notes, half of all public companies already make some climate disclosures in their SEC reports, and the Chamber of Commerce reports that more than half of surveyed companies publish sustainability reports. “About 1,020 U.S. companies voluntarily disclosed their Scope 3 emissions last year.”

Of course, as Commissioner Peirce does not do much to dispute, and as the proposing release makes clear, existing disclosures are spotty, inconsistent, incomplete and unverified under existing Commission rules.

Letting companies determine for themselves what is “material” in a given context can be a reasonable way to implement Congress’s choice of “full and fair” disclosure as a policy—sometimes, companies exercise such discretion well enough to generate enough information to protect investors; but particularly as applied to risks that are new, or which raise difficult management challenges, and where there are limited sources of external scrutiny relevant to the judgments, companies predictably fail to comply with their requirements. Although the content and nature of the disclosure have long been covered by Commission rules, the proposed rules add specificity, detail, and consistency (and require assurance) in ways that existing rules do not.

But nothing in the 1933 Act or the 1934 Act imposes limits on the Commission’s authority to refine the mode, detail, format, method, or specificity of required disclosures. In fact, its basic disclosure authorities (in Section 7 of the 1933 Act and Sections 12 and 13 of the 1934 Act) are augmented by additional specific authority to “to prescribe the form or forms in which required information shall be set forth.” If the Commission after fact-finding reasonably believes more detail is needed to protect investors about a concededly authorized topic, it is legally authorized to require more detail, as it has done through both rules and disclosure review since 1933. Economic analysis and expert fact-finding and assessments may inform choices about how detailed and what the details should be, and the Commission needs to follow its own economic analysis guidance in arriving at its conclusions, as well as comply with administrative law. But its basic statutory authority does not limit the level of generality at which an otherwise long-required disclosure topic may be addressed.

Specifically, for the largest companies, the proposed rule would require three types of specific disclosures:

  1. qualitative disclosures (about financial risks, trends, and governance) of the kind that are already in principle required in risk factors, MD&A, the proxy rules, and other line items in Regulation S-K, and which therefore many companies already provide, but not in a consistent or comparable way),
  2. Scope 1 and Scope 2 emissions data (and if material or the subject of a target the company has chosen to disclose, Scope 3 emissions), equivalent to key performance indicators of the kind required to be disclosed in MD&A, and
  3. financial statements footnote breakouts, where climate affects an item by 1% or more.

Of these, the first and third are inarguably about financial risks and opportunities related to climate change. The second—emissions data—is widely used as measures of transition risk, that is, the risk that energy costs and policy responses by other lawmaking bodies (not the Commission) (some of which are already reflected in treaty commitments or other enacted policies of the US and other countries in which US public companies do business) will force companies to expend money to reduce their emissions or mitigate their impacts.

Evidence regarding the clear and present financial materiality of transition risk is discussed below. These data, again, are thus directly relevant to financial risks and opportunities for public companies.

Far from calling for lengthy or complex sustainability reports of the kind most S&P 500 companies already publish, these requirements could be met with relatively succinct disclosure for companies with minimal climate-related risks. For example, many companies have no major facilities in flood plains, do not consume significant amounts of energy, and do not produce significant greenhouse gas emissions. Based on a review of current sustainability reports that cover the same topics as would be required by the proposed rule, companies with material climate risks could create compliant disclosure that would take up a relatively small share of a typical annual report.

Companies may choose—as many do now—to go beyond what is required, to convince investors and others that (for example) their strategies are going to succeed. The same could be said of most existing disclosure requirements. Earnings statements, analyst call scripts, investor presentations, and the regular flows of press releases, investor relations communications and other ways companies supplement disclosure requirements are commonly longer or more complex than anything required by the Commission’s rules. That does not make those rules unduly burdensome or costly.

3. The proposed disclosures are rationally designed for investor protection

The question of whether the proposed disclosures would in fact be an all-in good idea, cost-justified, appropriately considering efficiency, competition and capital formation is not a legal question. Rather, as long as the Commission considers that question in good faith and follows appropriate process, Congress has directed that the Commission make that decision, not the courts. However, the rule does need to at least be rationally designed for investor protection to be authorized. That is because it is true that the Commission’s authority does not run so far as to require disclosures for any reason, or for reasons not specified in its organic statutes.

That legal question—whether the proposed disclosures could reasonably be viewed in good faith by the Commission as beneficial for investor protection—is easy to answer in the affirmative, based on the record before the Commission when it voted to propose them. As background, noted in the proposing release, the Commission published a request for comment a year earlier—on March 15, 2021—so that its current process has already gone beyond the requirements of administrative law. That request elicited massive amounts of public input on potential climate-related disclosure, and gave anyone skeptical about the project ample notice that it was on the Commission’s agenda, and ample time to adduce evidence against it.

Instead of the resulting input showing the idea would be a bad one, or not reasonably designed to protect investors, the request generated substantial evidence that climate-related disclosures would be valued by investors. Importantly, supporting letters came from many public companies (e.g., Adobe; Bank of America; BNP Paribas; Chevron; Dow Credit Suisse; Etsy; Microsoft; Paypal; Salesforce.com). Public companies have a strong incentive to keep abreast of what information their investors would reasonably value.

Supporting statements were also overwhelmingly filed directly by investors of all kinds (not just or even primarily from socially activist or “impact” investors). These investors included individuals and institutions. The institutions included both passive index funds and actively managed funds, as well as pension funds and other kinds of institutions. Among them were Alliance-Bernstein, Neuberger-Berman, Schroder and Wellington, as well as BlackRock and State Street. Contrary to some critics, letters from individuals also supported climate-related disclosures and were cited several times in the proposing release. Thousands more have been filed since the release was proposed, including many from self-identified individual investors. Surveys of institutional investors published in peer-reviewed financial journals confirm this evidence. Surveys of individual investors by firms such as Morgan Stanley confirm this evidence. Shareholders stunned virtually everyone, including ExxonMobil’s management, when they elected dissident directors pledged to change the company’s climate policy with 62% of the vote, while shareholders voted for emissions disclosure proposals at ConocoPhillips and Chevron. Efforts by critics to dismiss these votes ignore the fact that most shareholder proposals fail due to well-known collective action problems affecting public company governance.

Some critics argue that “investor demand” should not be equated with “investor protection,” and it is true that the Commission has not (for good reason) attempted to survey investors in setting its own rulemaking agenda. The Commission is charged with protecting investors generally, and even if a subset of investors believe that they do not (or do) want or need particular information, their views should not necessarily control the Commission in the exercise of its expert judgment. Although Congress gave the Commission power to conduct “temporary testing programs” to evaluate the effectiveness of disclosures in the Dodd-Frank Act, in neither that statute nor the original 1933 and 1934 Acts did it suggest the Commission use polling or surveys to establish the content of disclosures appropriate to protect investors.

But the proposing release goes beyond the numerous supportive investor comments in the March comment file to note at length many kinds of additional evidence showing ways in which more, more comparable, and more reliable information would protect investors by improving their ability to assess and price climate-related financial risks and opportunities, both at the time of initial stock investments and in secondary market trading. The release cites a number of studies to this effect. One study worth highlighting, now published in a leading finance journal, finds that climate disclosures are already actively if imperfectly priced in the capital markets, effects confirmed in other published articles. Another finds that climate risks are reflected (but imperfectly) in out-of-the-money put option prices. Another peer-reviewed, published study finds that exposure to sea level rises and flooding is causally reducing property values, consistent with physical risk already being actively if imperfectly priced in property markets, which in turn expose investors in public companies that own real estate to related financial risks. Still another study finds that mutual fund managers are misestimating climate risks based on current, inconsistent and unreliable disclosures. One need not believe any of these studies is the final word on the subject to believe that collectively, they provide sufficient evidence to believe, reasonably, that verified, consistent climate-related financial disclosures would be useful to protect investors.

In addressing this research, it is insufficient for critics to gesture generically at the fact that correlation is not necessarily causation, or that no single such study can definitively prove a causal effect of climate on financial returns. If arguments of that kind could limit rulemaking authority, the Commission could never have adopted any disclosure rules. Empirical studies of financial markets and regulation have always had strong and inherent methodological limits, well-known and not seriously disputed, as well as data limitations. Those limits were even more acute in 1933 (or even in 1996 when the Commission was first statutorily tasked with considering “efficiency” in some of its rulemakings). Congress wanted and authorized the Commission to require disclosure to protect investors despite these limits, based on its expert judgment about what its experience and qualitative evidence showed it, supplemented by whatever science can add. Nothing in law suggests that uncertainty, however reasonable, legally forbids rulemaking.

But beyond academic research, hardest for any neutral observer to challenge as evidence of the financial risks related to climate—and the reasonableness of climate-related financial disclosures to protect investors—comes from public companies themselves. Sixty percent of the Fortune 500 have announced climate targets, typically stated with reference to emissions data, including 17% with net-zero targets, yet 72% of investors lack confidence companies are serious about these targets. If those emissions targets are serious, they will matter to investors by leading to major changes in corporate strategy and investment policy, and in the financial risks and returns companies will generate for investors. If those targets are simply greenwashing, the proposed rules will reduce their potential to harm investors caused by fraud or misleading disclosure short of fraud. Evidence that such targets are at least partly serious can be easily compiled from public sources, some cited in the proposing release:

  • General Motors announced it plans to sell only electric passenger vehicles by 2035.
  • Volkswagen announced $180 billion of investments in electronic vehicles.
  • Chevron plans $2.75 billion in carbon-reduction projects, renewables and offset projects.
  • Exxon Mobil plans to invest $100 billion in carbon capture infrastructure.
  • A consortium of public energy companies is raising $1 billion for emissions reductions technology.
  • Duke Energy is investing $52 billion in transitioning to lower carbon resources.
  • Graphic Packaging is spending $600 million on the first paperboard line in the U.S. in decades, in part to lower carbon emissions.
  • US Steel abandoned plans to expand its Mon Valley Works in Pennsylvania, because it had “expanded our understanding of steelmaking’s future in a rapidly decarbonizing world,” resulting in $56 million write-off in 2021.

A list of massive—far beyond “material”—bets being won or lost with public investor capital driven by climate risk could be significantly longer without being exhaustive. An increasing number of US public companies are making major capital expenditures to pursue climate-related strategies, raising financial risks to pursue opportunities for their investors. The proposed disclosures, including emission data, will help investors assess and price these risks and opportunities. The claim that the proposed rule’s requirements are so unrelated to investor protection as to altogether fall outside the Commission’s obligation to specify financial risk disclosures is without merit.

Finally, critics sometimes argue that investors do not need protection of mandatory climate-related financial disclosures because companies are already voluntarily making such information available. It is true that many companies are spending money to do this—further evidence of the importance of the information. But it is also clear that companies are not doing so consistently, comparably, or reliably. Voluntary, unassured disclosures are more likely to include greenwashing, impairing investors’ ability to assess and price risk, and undermining honest companies’ ability to communicate with investors and build confidence; some greenwashing rises to the level of fraud, while other disclosures or omissions may not rise to the level of actionable fraud with proof of scienter. The proposed rule is reasonably designed to address these inconsistencies, give investors comparable information, and make it more reliable. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. In adopting mandatory “risk factor” disclosures, for example, which had previously been made by many companies, but not by all; in adopting disclosure requirements for derivative contracts, which many companies had disclosed in detail, but others had not; and in codifying thresholds for disclosure of environmental liabilities, which many companies had been previously disclosing, but not all, or consistently, or reliably.

4. The rule builds on existing, widely used and privately developed disclosure frameworks

Further reducing concerns about whether the rule is within the Commission’s expertise, the proposed rule aligns with ways that companies and investors have jointly and voluntarily agreed to provide climate-related information. The rule builds on decades-long efforts by public companies—such as 3M, Abbott Laboratories, Amazon, Apple, Chevron, Fujitsu, IBM, Johnson Controls, Michelin, P&G, Verizon and Walmart—to develop practical, decision-useful, consistent, comparable and verifiable ways to report about climate risks and opportunities. As a result, the rule will minimize costs and maximize benefits of compliance.

In its overall framework, the proposed rule builds on the Task Force on Climate Related Financial Disclosure (TCFD), whose leadership includes the CFO of Unilever, the General Manager of Mitsubishi, and the former CAO of HSBC, and whose work has been supported by Bank of America, Barrick Gold, Dupont, Hewlett Packard, and Pepsico, among scores of other companies. Its greenhouse gas emission disclosure elements are aligned with the EPA’s existing requirements for US emission sources, which in turn are aligned with the widely used and privately developed Greenhouse Gas Protocol, which was a joint product of companies, investors and other organizations.

5. The rule addresses financial-physical risks, which EPA regulations do not address

Consistent with the long tradition of disclosure requirements sketched above and in Annex A, the proposed rule specifies disclosure of climate-related financial risks to and opportunities for public companies. Financial risks importantly include physical risks, such as those arising from severe weather events, such as floods, hurricanes, and wildfires. It cannot fairly be argued that losing production or even permanent asset impairments due to weather damage are not financial risks for companies with property, plant and equipment in flood plains or otherwise exposed to climate-related weather events.

The financial effects of physical risks are large and growing. As noted in the Commission’s 2010 climate guidance, “A 2007 [GAO] report states that 88% of all property losses paid insurers between 1980 and 2005 were weather-related.” Since 1980, the US alone has experienced 323 severe weather events causing more than $1 billion of damage each. The World Meteorological Organization has tracked damage from weather events for the past fifty years; the top five most economically destructive events all occurred since 2005.

By contrast, the focus of traditional environmental regulation—including EPA reporting rules—is solely the reverse—the impact of companies on climate change. EPA is charged by Congress to have a concern for the environment, not for investors. Neither EPA nor any other federal agency has authority to elicit the full range of information about financial risks that would be provided to investors under this rule. Protecting investors has been the Commission’s job since 1934. It has never been EPA’s job.

6. The rule is limited and calibrated to public companies with securities trading in the U.S.

The rule is limited to companies from which the Commission has traditionally required full disclosure. It requires no disclosure from privately held unlisted companies. As a result:

  • Climate-affecting companies owned by individuals, governments, families, or private equity funds would not be directly affected.
  • Large multinationals—even in the oil and gas or energy sectors, even actively emitting greenhouse gases in the US—would be unaffected if they list no securities in our markets.

As a result of these limits, climate advocates appropriately view the rule as incomplete, and from the point of view of environmental protection, the rule could not reasonably be viewed as complete or effective at addressing climate change. Anyone who sees a role for law to require disclosure of comprehensive information about the sources of greenhouse gas emissions will not be satisfied by this rule. If comprehensive, economy-wide disclosure of climate impacts of all types of business is to be required by regulation, doing so will require more than the Commission’s authority. But for the protection of investors, these limits are features, not bugs—they precisely show how the rule adheres to Congress’s clear but limited delegation of disclosure specification to the Commission.

Some may view these limits as creating incentives for public companies to go private, or for private companies to not go public. Public companies are already subject to more regulation, however, and if the requirements of the Sarbanes-Oxley Act did not drive a wave of going private transactions (and they did not), the marginal additions to disclosure required by this rule is highly unlikely to do so. Most public companies could “go dark” today, if they were prepared to surrender their stock exchange listings. Most large public companies report much climate information, albeit in a non-comparable and inconsistent way. Private equity fund investors are already and increasingly demanding climate-related information and commitments from the funds or their advisors. Banks and insurance companies are increasingly demanding similar information to make loans or underwrite policies. Large asset managers are already having to comply with similar requirements in Europe (regardless of where their portfolio investments are located).

Nonetheless, whatever one thinks about the incentives for companies to go public or private, that question only bears on the efficiency or capital-formation impacts of the proposed rule, and how they compare to its advancement of investor protection, not on its legality. Instead, the rule’s limits—to public companies with securities trading in the U.S.—again underscore how it is well within the scope of traditional securities law, designed for investor protection, and not for other goals.

The rule is also calibrated to companies, not the environment. That is, the rule’s perspective of that of investors and companies—their strategies, risk management, governance and metrics—without regard to whether a given company independently creates a climate impact that is large or small for the overall environment, or whether it is more or less exposed than other companies to physical risks of climate change. If a given climate risk or opportunity is large for a company, then its investors need and would under the rule obtain information about that risk or opportunity, even if (when compared to the overall impact of all human activity on the environment) the risk or opportunity is not large enough to require reporting under some other regime (such as the EPA’s greenhouse gas reporting regime).

Again, some may view this company-calibrated focus as distracting, because the rule is not limited (for example) to industries that have the greatest environmental impact, such as oil and gas, or energy. From an environmental policy perspective, prioritizing based on environmental impact might make sense. EPA, for example, exempts from reporting emission sources below source-specific thresholds. A public company might have a large amount of transition risk due to many different emission sources, each of which is below EPA thresholds. For EPA, those emissions may not be a priority. But for investors in that company, they reasonably could be, because the transition risks (in the form of higher energy costs or potential need for capital expenditures to mitigate their impacts) could be large for that company, depending on its size, capital, liquidity and financial resources. From a legal authority point of view, company- and investor-based calibration is in keeping with the Commission focusing on investors, rather than on environmental priorities.

7. The rule does not include non-investor-oriented impacts

In addition to being limited and calibrated to U.S. public companies, the rule does not require disclosure related to non-investor impacts. For example, it does not call for disclosure of a company’s climate-related impacts on employees or customers or communities, except to the extent those impacts result in overall financial or business risks or opportunities (which do impact investors). If the public wants comprehensive disclosures of climate impact that extend beyond impacts on investors, legal authorities other than those used here may need to be used—perhaps by other agencies or Congress itself. Again, this limit may leave some climate advocates disappointed. But for purposes of assessing the legal issues raised by the proposed rule, this limit underscores how the rule is investor-oriented and tailored, consistent with the securities laws.

8. The rule extends to global climate-financial risks and opportunities of US public companies

Although the rule is more limited than what an “impact” advocate would want, it is in one important way broader than anything EPA has adopted or is likely to have to power to implement: its geographic reach. If a U.S. public company owns facilities outside the US, as many do, they would be required to provide investors with information about those facilities. Currently, EPA does not purport to require disclosures about greenhouse gas emissions from facilities located outside the US, even if they are owned by US companies. US public companies (e.g., the S&P 500) derive 40% of their revenues on average from non-US operations, and many have larger shares of their activities located offshore.

Again, this difference is in keeping with the Commission’s focus on investors. In the nature of corporate investment, investors in multinational US public companies bear climate-related financial risks and have opportunities to profit from their global activities. The Commission has always required information about a U.S. public company’s consolidated subsidiaries—wherever located. This is for the obvious reason that investors in the parent company face the consequences of all economic results created by that company.

EPA, by contrast, focuses on conduct in the United States. As regards climate change, environmental agencies might do well to focus on global activities as well, but it is unclear how EPA could with its existing legal authority impose requirements on companies not operating in the US. Anyone who argues that the Commission should leave the job of climate disclosure to the EPA has to have an answer to how the EPA could possibly protect US investors with information about the large amount of activities of US public companies that are located beyond the reach of the EPA’s jurisdiction.

9. The provides a framework for reliable disclosures about opportunities (and risks), enabling capital cost reductions (or increases) for public companies regardless of their exposures to climate change

The rule would create a framework for reliable disclosures of climate-related information that is potentially positive for investors, such as opportunities, and is not limited to risks. If markets are currently overly negative about a company’s physical risks (e.g., to floods), such disclosures would facilitate a reduction in that company’s cost of capital. If a company would benefit from climate-mitigation policies adopted by other agencies, that information would be no less useful to investors than information about transition risk.

The rule as proposed would provide a framework for companies to inform investors about all of the effects—profitable and loss-causing—that climate risks may have on a company. The ways investors may use the information are not predetermined by the rule, nor would the rule itself limit how companies speak about whether (for example) climate risks are currently being overestimated or producing excessive disinvestment. As a result, depending on current capital market pricing, the rule could increase climate-impacting activities. Claims that disclosure would incentivize companies only to reduce or mitigate climate change impacts are not well considered.

10. Congress did not reduce Commission authority in giving EPA climate disclosure authority

EPA was created in 1970. Its creation was accomplished by Presidential directive, subsequently approved by Congress in 1984. The directive consolidated authorities and activities spread across six different departments and agencies, ranging from the Department of Agriculture to the Atomic Energy Commission. In contrast to the specific mentions of these other federal agencies, the authorizing document, Reorganization Plan No. 3 of 1970, nowhere mentions the Securities and Exchange Commission.

In the Clean Air Act amendments of 1970, Congress gave EPA authority to require disclosures relating to the environment. The focus of those amendments, however, was the creation of national air quality standards—what we generally call “pollution”—and the enforcement of those standards on a set schedule. Reporting requirements regarding emissions of all kinds were a subsidiary authority given to EPA to supplement the more direct, substantive power to regulate the amount and type of emissions.

More than thirty years later, EPA had not applied its authority to require emissions disclosures to greenhouse gas emissions. Over that time, as noted above, the SEC proposed and adopted rules requiring environmental disclosures, in part to satisfy its obligations under NEPA. The D.C. Circuit affirmatively held that the Commission had authority to do that, and, in its judgment, to potentially go further.

No one at the time of NRDC v. SEC in 1979 argued that the creation of EPA in 1970 had overridden NEPA, or limited the 1933 or 1934 Acts, as the Commission itself would have done (because, recall, it was being sued in the 1970s for not doing enough to require environmental disclosure). If Congress had intended to displace Commission disclosure authority regarding environmental matters (including climate-related financial disclosures) when it gave EPA authority to require disclosure in 1970, it seems surprising (to put it mildly) that Congress did not respond after the Commission adopted environmental disclosure rules in the 1970s.

EPA did not use its authority to develop greenhouse gas emission disclosure requirements until 2009, and did so only after being directed to do so by Congress in an annual budget appropriations rider. Only at that time did EPA take the position its 1970 authority over air pollution gave it authority to require climate-related disclosures. In the budget rider, Congress made no mention of any other agency, nor can the text of that law be reasonably interpreted to displace any agency’s authority. Nor did Congress trim back the Commission’s authority when—after the Commission published climate-related disclosure guidance in February 2010—Congress adopted the Dodd-Frank Act four months later, with numerous additions (not subtractions) to the Commission’s disclosure authorities.

But critics’ claim that EPA authority repealed the Commission’s authority is even more basically addressed by noting the significant differences in the two agencies’ organic statutes as applied to climate-related financial risk. To recap what is discussed above, EPA’s authority is both materially broader and narrower than the Commission’s, even as to the subpart of the Commission’s rule addressing greenhouse gas emissions:

  • EPA only has authority over US emission sources. The Commission has authority over disclosure about all activities of a consolidated multinational if it is a US public company, including the 40+% or more of those activities that are located outside the US, as noted above.
  • EPA has no authority over disclosures about physical risks, or the financial risks of climate change to companies (and investors). The Commission does, but has no investor-protection authority over climate impacts more generally, such as those on communities or habitats, beyond impacts that are important to investors’ decision-making.
  • EPA has authority over private companies, while the Commission’s proposed rule covers only public companies.

In sum, EPA could not duplicate (or even approximate) the proposed investor-oriented rule, and the Commission could not duplicate (or even approximate) EPA’s greenhouse gas disclosure rules. The Commission cannot shirk its duty to protect investors even if that duty to an extent overlaps with EPA’s duty to protect the environment.

Finally, it is beyond argument that the Clean Air Act nowhere mentions the Commission much less modifies its disclosure authority. For centuries, it has been a “cardinal rule” that “repeals by implication are not favored.” Indeed, a standard reference on statutory interpretation by Antonin Scalia and Bryan Garner goes further, makes the “rule” one of its black-letter canons, and emphasizes it, writing: “Repeals by implication are disfavored—‘very much disfavored.’” It also offers a sensible explanation for the canon: “A doctrine of readily implied repealer would repeatedly place earlier enactments in doubt.”

Implied repeals occur only when two statutes are in “irreconcilable conflict” or when a later act “covers the whole subject of the earlier one and is clearly intended as a substitute.” “In either case, the intention of the legislature to repeal must be clear and manifest.” Nothing about the Clean Air Act is in “irreconcilable conflict” with the securities laws, and as just discussed, the Clean Air Act and subsequent EPA rulemaking address and could address only a part of what the proposed rule would address, even focusing narrowly on greenhouse gas emissions disclosure alone. Bare claims that a later-in-time-statute addressing a different agency and a different set of legislative purposes are ever viewed by courts as silently trumping earlier statutes if their content overlaps in any way, or if the later one is in some way more specific than the earlier one, are wrong as a matter of law.

11. The rule calls for disclosure of facts, and in no way restricts free speech

The proposed rule does not call for opinion or “controversial” speech of the kind that raises First Amendment concerns. It specifies disclosure of facts, in neutral language. Companies objectively do or do not have strategies that reflect transition risk or physical risks of climate change. Companies either do or do not engage in activities that result in the emission of greenhouse gases. Companies either do or do not have property, plant and equipment in flood plains. The rule does not require them to use particular words, or characterize their own conduct in any controversial way. Although courts have increasingly applied the First Amendment to disclosure obligations over time, critics are able to cite no case law supporting the notion that simply because facts may inform or be relevant to a political debate, requirements calling for disclosure of those facts are subject to heightened scrutiny, much less violate the First Amendment.

Companies could comply with the rule and say:

  • They believe climate risks are minimal for the company, or for the world, for whatever reason, if that is their honest belief.
  • They believe climate change is not primarily caused by human activity.
  • That climate risks overall have been overstated by climate activists.

No debate over the level of risk created by climate change is predetermined or purported to be resolved by the rule. The only limit on companies’ ability to speak about climate is a long-standing limit—not created by the proposed rule—that they not lie or deceptively omit material information in doing so. Laws against fraud have always been consistent with the First Amendment.

12. The rule does not address a “major question” justifying deviation from normal interpretation

As detailed above, the proposed rule could not fairly be viewed as embodying “climate change” policy generally. It only specifies disclosures, and does not “regulate climate change,” or regulate climate emissions. It does not impose regulatory “control over millions of small greenhouse gas sources.” Even as a disclosure rule, it only calls for a subset of the climate-related disclosures from a subset of companies that affect climate change. A comprehensive reporting regime would apply to all companies, worldwide, regardless of ownership, and would encompass impacts generally, rather than solely physical risks and transition risks to investors in US public companies. Rather, it calls for specific disclosures that investors in US public companies need to evaluate and price climate-related financial risks and opportunities.

Although “climate change” overall indisputably raises important policy questions, those remain for Congress. They will go unresolved by this proposed rule. Even as to the financial system, it does not set out comprehensive climate policy. The proposed rule would not require national banks to consider climate-risks in lending activities—that is for banking regulators. It would not affect the way that property insurers underwrite, pool or reserve against climate risks—that is for insurance regulators. It would not affect how mutual funds and other collective investment vehicles market themselves, even as to the climate risks in their portfolios—that topic is within the Commission’s authority, but it is not addressed in this proposed rule.

This rule would not “transform” even the “portion of the American economy” regulated by the Commission—which remains investments in and markets for securities of public companies, not privately held companies, and the proposal adds no new companies to its disclosure regime. It would have a relatively modest impact on the economy as a whole, and basically “levels up” disclosure requirements to disclosures already made by the majority of large companies. Nor does the proposal purport to be authorized by a newly discovered “power” in the securities laws—the power is disclosure, as it has been for nearly a century.

It does not even address new topics for purposes of disclosure, but instead (as discussed above) changes the specificity and mode of disclosure about long-regulated topics. As a result, it would not “intrude” into topics or company-investor relationships that are “markedly different” from other authorized and long-standing rules. The “major questions doctrine” has no role to change the plain text of the 1933 and 1934 Acts.

Even if some may find resistance to the rule (or new regulation generally) to be “appealing from a policy standpoint,” doing that here has “no basis whatsoever in the statute’s text.”

Instead, basic principles of statutory interpretation support the Commission’s authority to adopt the proposed rule. The text, the ordinary meaning of its key words (that is, “other” and “information”), and their context (the title and relevant headings of the Commission’s organic statutes), as analyzed above, are clear as to the Commission’s ability to require the proposed disclosures for the protection of investors.

The context for the authorizing sections of those statutes supports the Commission’s authority:

  • The title of the 1933 Act states its purpose as creating a regime of “full and fair disclosure.”
  • The specific reliance throughout the statutes on disclosure as an instrument.
  • The long-recognized fact the statutes were “remedial” laws following the Crash of ’29.
  • The creation of an entire new agency (the Commission) to implement and enforce the laws.
  • The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them).

Canons against “ineffectiveness” and in favor of validity, and the “general terms” canon all caution against courts making up their own limits on textual authority, particularly on grounds such as:

  • The subject of a disclosure is new, when the nature of business and investment is dynamic,
  • A topic of a disclosure is “political,” or “controversial,” or is not “uncontroversially” for investor protection, any of which would only invite interest groups to politicize a topic in the hopes of later arguing it should be off limits for the Commission to address.

For the Commission programmatically to refuse to protect investors due to concerns about “politics” would itself be a political and controversial policy position. Congress did not direct the Commission to protect investors through disclosure only when it is politically non-controversial to do so.

Indeed, as stressed by Joseph Grundfest:

Congress created the Commission as an expert agency with the capacity to address significant problems affecting the nation’s securities markets. Congress also created the Commission as an agency that could thoughtfully address problems too politically charged to be easily resolved on Capitol Hill.

Finally, even if the “major questions doctrine” were thought relevant here, the contents of the proposal are—as discussed at length above and in Annex A—directly in keeping with the way that the Commission has functioned since inception. Traditionally, and as it has been used by the Supreme Court to date, the “major questions doctrine” is one of many canons that courts—as faithful agents of the Constitution and the Congress—use to interpret statutes, not rewrite them. Even if one has a strong belief in the value of the “major questions doctrine” as an important tool for enforcing the constitutional principle of separation of powers, there is no role for a clear statement principle when the text and context of a statute are as clear and consistent as the 1933 and 1934 Acts are.

When the only dissenting Commissioner’s primary basis for dissenting is that the Commission has already addressed the topic in prior rulemakings upheld by courts, courts have no basis for using one discretionary canon to apply personal policy judgments on a topic within the Commission’s conventional and textually clear statutory authority. To do so would turn the doctrine’s purpose against itself, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. Nothing at stake in this proposed rule justifies such judicial lawmaking. “In the context of legislation that does not implicate fundamental rights or a suspect class, faithful enforcement of the Constitution requires a court to hew as closely as possible to the norm of faithful agency by enforcing the text unadulterated by judicial tweaking.”

The complete publication, including footnotes and annex, is available here.

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