SEC Authority Over Climate-Related Disclosures For Investors

• Published date: 10 August 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Securities
• Law Firm: Morvillo Abramowitz Grand Iason & Anello
• Author: Mr Jonathan Sack and Daniel Gordon

On March 21, 2022, the United States Securities and Exchange Commission (the SEC) issued a 490-page proposed rule about enhancing and standardizing climate-related disclosures for investors. If adopted, it would mandate extensive climate-related disclosures by public companies. The notice and comment period closed on June 17, 2022. The comments received by the SEC could lead it to abandon the proposed rule, make substantial changes and reopen the notice and comment period, or make modest revisions and vote on a final rule.

The proposed rule sets out what is arguably the most expansive new disclosure regime in decades. If adopted, it would require companies to disclose in registration statements and annual reports greenhouse gas emission figures, climaterelated risks, company oversight processes regarding those risks, various climate-related financial statement metrics, and, if applicable, information about climate-related targets, goals, and transition plans.

The proposed rule has generated significant controversy. During the notice and comment period, the SEC was flooded with thousands of comments discussing its propriety. Many of these comments argue for and against the proposal on its merits-debating whether the proposal, if adopted, would achieve worthwhile goals and be effective-but several notable critics, including various members of Congress, governors, state attorneys general, and legal scholars, have gone further and questioned the legal viability of the proposed disclosure rules. These critics have previewed potential legal challenges that may be brought should the rule ultimately go into effect.

This article addresses one specific challenge-that the SEC lacks the authority to adopt the proposed rule, and, in particular, lacks the authority to mandate disclosure of greenhouse gas emission figures. After providing a very brief overview of the proposed rule, the article discusses Congress's grant of rule-making authority to the SEC and then turns to various arguments about the scope of that authority in the context of the proposed rule. Finally, we look at other doctrines applicable to the SEC's authority, including the "major questions" doctrine most recently relied upon by the Supreme Court in West Virginia v. EPA, 2022 BL 227045 (U.S. June 30, 2022).

The analysis below suggests that challenges to the SEC's rule-making authority would have considerable force and may very well affect the ultimate content and validity of the proposed rule.

Background

Broadly speaking, the proposed rule-"The Enhancement and Standardization of Climate-Related Disclosures for Investors"-consists of multiple lengthy discussions of the SEC's views as to the importance of the new climate disclosure regime, details of the various disclosure requirements, and an economic analysis that tries to balance the supposed costs of compliance with the benefits of the new rule.

The proposal was approved in a three-to-one vote over the dissent of Commissioner Hester Peirce. In a dissenting statement, "We are Not the Securities and Environment Commission-At Least Not Yet," Peirce criticized the proposed rule on numerous grounds. As relevant to this article, she argued that the SEC lacks authority to adopt such a rule...